SRG - Seritage Growth Properties

[scorpioncapital]

I see it more as the spark to light the fire of self-sustaining development. So yeah, 11%-7% or 3% to start, if you pay it off, then you get the full cash-flows later on. And it's for a subset of costs. If income starts coming in at a fast enough pace, then you won't need it - the so-called goal of reaching the perpetual motion machine phase.

[BTShine]

If you consider the entire company ‘greenfield’ (assuming zero lease income from SHLD) and the only avenue forward is via 3rd party leases on redevelopment, the returns are more like 15%+.  I say this from a pessimistic perspective assuming all buildings are dark.  From that angle, this financing is much more attractive and the spreads more like 15-7%.

 

It’s not just the value creation, it’s also the value retention by replacing the Sears lease with a stable 3rd party. 

[SlowAppreciation]

https://www.wsj.com/articles/shopping-mall-operator-westfield-valued-at-15-7-billion-in-takeover-offer-1513061175

[frommi]

https://www.wsj.com/articles/shopping-mall-operator-westfield-valued-at-15-7-billion-in-takeover-offer-1513061175

 

Am i right that this was a 4.7% caprate?

My NAV estimation for the end of 2018 for SRG is somewhere around ~53$ (with a 5.7% caprate) based on the latest 10-Q, growing at ~15% the years after. Can`t find a better long term investment at the moment, if my assumptions are correct. (Has someone good/better caprate estimations for the SRG portfolio?)

 

Wouldn`t it be best to just develop the malls, then sell them immediately at private market valuations and reuse the capital to develop the next ones or buy back shares at current prices? Are there tax consequences or other reasons to hold onto the developed properties?

[OnTheShouldersOfGiants]

Where did you find NOI numbers for Westfield? 

[frommi]

Where did you find NOI numbers for Westfield?

 

Annual report? https://westfieldcorp.staging.carbonhouse.com/assets/doc/AR16-Westfield-Corp-Financials_D9-474c90164f.pdf

"Net property income".

For SRG i calculated the caprate SRG used to value the joint ventures on the balance sheet. I hope i didn`t make a mistake in my calculations.

[koshigoe]

Some big projects in the works:

 

https://www.redmond.gov/common/pages/UserFile.aspx?fileId=217828

 

also:

 

http://www.citizen-times.com/story/news/local/2017/12/29/proposed-asheville-mall-redevelopment-sears-movie-theater-restaurants-housing-apartments/989873001/

 

[SlowAppreciation]

https://www.reit.com/news/videos/seritage-ceo-says-leasing-activity-accelerated-2017

[CorpRaider]

Drink from the fire hose?

 

http://fortune.com/2018/01/04/sears-stores-closing-2/

[LongTermView]

Drink from the fire hose?

 

http://fortune.com/2018/01/04/sears-stores-closing-2/

 

Has anyone gone through this http://searsholdings.com/docs/010418-store-closing-list.pdf 103 store list to identify which ones are part of the Seritage portfolio?

[Foreign Tuffett]

Drink from the fire hose?

 

http://fortune.com/2018/01/04/sears-stores-closing-2/

 

Has anyone gone through this http://searsholdings.com/docs/010418-store-closing-list.pdf 103 store list to identify which ones are part of the Seritage portfolio?

 

I've skimmed it and found four:

 

Hicksville, NY (SRG planning a large mixed use development)

Boca Raton, FL (Town Center at Boca Raton is a very high quality mall)

Westminster, CA (not a particularly high quality mall)

Austin, TX (this store was already on SRG's redevelopment list, with an estimated completion in Q3 2019)

 

There may be some that I missed. My guess is that these weren't SHLD termination properties, they were SRG wanting to recapture the space for redevelopment.

 

 

[LongTermView]

1/18/2018 Release: http://ir.seritage.com/file/Index?KeyFile=391812307

 


Cliffs:

 

Signed new leases totaling over 870,000 sf in 4Q17.

 

Leased GLA is now 4.83 million with $86 million in annual rent compared to leased GLA of 3.96 million with annual rent of $71 million in the 3Q17 supplemental.

 

Development is now 6.20 million sf with projected annual income of $157 million compared to 4.95 million sf with projected annual income of $105 million in the 3Q17 supplemental.

 

[scorpioncapital]

I was wondering if someone understood the REIT dividend requirements on SRG. For example, in 2016 they earned $92 million after adding back depreciation to a net loss. The dividend on the 25 or so million shares would be $25 million or 27% of the total cash flow. Now this seems like a cool trick of redevelopment that you can pay out only 27% instead of the usual 90% that REITS must pay out. I looked at another Berkshire investment STOR capital and over there, the company is literally paying out 70% of their AFFO in 2016. Is there something hiding - temporarily for a longer while - the ability to retain more earnings than other REITs? This is obviously better in terms of the need to issue equity and debt if you can retain more earnings to self-finance yourself when other REITs must continue to raise capital with debt/equity to grow their business. Or in SRG's case, this situation will at some point change and it too will be paying out 90%?

[frommi]

I was wondering if someone understood the REIT dividend requirements on SRG. For example, in 2016 they earned $92 million after adding back depreciation to a net loss. The dividend on the 25 or so million shares would be $25 million or 27% of the total cash flow. Now this seems like a cool trick of redevelopment that you can pay out only 27% instead of the usual 90% that REITS must pay out. I looked at another Berkshire investment STOR capital and over there, the company is literally paying out 70% of their AFFO in 2016. Is there something hiding - temporarily for a longer while - the ability to retain more earnings than other REITs? This is obviously better in terms of the need to issue equity and debt if you can retain more earnings to self-finance yourself when other REITs must continue to raise capital with debt/equity to grow their business. Or in SRG's case, this situation will at some point change and it too will be paying out 90%?

 

REITs have to distribute 90% of their taxable earnings.

 

https://seekingalpha.com/article/3062776-reits-the-90-percent-rule-isnt-that-big-a-deal

[scorpioncapital]

Great article, thanks. I take it as long as net income is negative, there is no obligation to pay any dividend.

 

The article asks a good question: why are some REITs so generous when they are not obligated to pay anything due to a negative net income, they pay something.

 

For example, SRG just floated a 7% preferred security to raise 70 to 100m. That is just a little under the dividend and operating partner unit distributions paid from inception to the end of 2017. If they didn't pay me a 2.8% dividend yield over this period, they could have paid me a 7% dividend by NOT taking this loan. Another way to look at it, if new redevelopment is yielding unlevered 10-11%, then every dollar of dividend paid seems a lower return than the company can generate with those funds. I don't get - in this particular situation anyway - why they pay a single penny in dividend when all of their return, debt and equity yields 7 to 10% and they are not obligated to pay anything until their taxable income turns positive.

[Foreign Tuffett]

1/18/2018 Release: http://ir.seritage.com/file/Index?KeyFile=391812307

 


Cliffs:

 

Signed new leases totaling over 870,000 sf in 4Q17.

 

Leased GLA is now 4.83 million with $86 million in annual rent compared to leased GLA of 3.96 million with annual rent of $71 million in the 3Q17 supplemental.

 

Development is now 6.20 million sf with projected annual income of $157 million compared to 4.95 million sf with projected annual income of $105 million in the 3Q17 supplemental.

 

Another solid quarter of leasing activity. The press release mentions that redevelopment activity has started at the Santa Monica, Adventura, and La Jolla properties. These are three of SRG's highest quality properties, with Adventura and Santa Monica probably being the two highest quality properties in SRG's entire portfolio. I don't think these properties have any signed leases yet. I think there is significant "hidden" upside from these properties getting leased up as their redevelopment continues.

[johnny]

Great article, thanks. I take it as long as net income is negative, there is no obligation to pay any dividend.

 

The article asks a good question: why are some REITs so generous when they are not obligated to pay anything due to a negative net income, they pay something.

 

For example, SRG just floated a 7% preferred security to raise 70 to 100m. That is just a little under the dividend and operating partner unit distributions paid from inception to the end of 2017. If they didn't pay me a 2.8% dividend yield over this period, they could have paid me a 7% dividend by NOT taking this loan. Another way to look at it, if new redevelopment is yielding unlevered 10-11%, then every dollar of dividend paid seems a lower return than the company can generate with those funds. I don't get - in this particular situation anyway - why they pay a single penny in dividend when all of their return, debt and equity yields 7 to 10% and they are not obligated to pay anything until their taxable income turns positive.

 

Think this has been covered, but if there's a norm in REITspace for paying dividends, then the costs of violating the norm may be much higher than following it. If, for example, your no-distribution rationality results in a huge chunk of institutional buyers shunning your equity (for being a "broken" REIT), then the pricing penalty you suffer may be quite a bit larger (especially in a case like this where we -know- that the opportunities are going to require significant extra capital to execute on a favorable timeline).

 

Is it better to raise $3B over the next decade under the No Shun Condition, or is it better to have to raise $2.7B under the Shun Condition?

 

Not saying that this is the "correct" decision, but I think it's what is somewhere in the back of one's mind when they're testing the idea that they should exercise Perfect Rationality on what is, in the big picture, a relatively immaterial decision about the company's capitalization.

[scorpioncapital]

They can always start paying the dividend when they need the money. So far if they didn't pay a dividend for 2 years they wouldn't need any capital. They could start the dividend today...and let's say the dilution if you issued equity of 100 million at $40 is 2.5 million shares out of 55 million it's 4.5%. It seems small but over time it can add up. I'm not entirely sure that they need alot more money than what Lampert and the relatively small preference shares have gotten so far...at least perhaps for another little while. Also I'm of the philosophy if you have the luxury of a net loss and run a REIT and have the option to not pay a dividend it's like splitting doubles in blackjack, it's just something you almost always should take until that opportunity is no longer available. Also I think SRG is already pretty shunned at current prices and with such a low dividend, very few are buying it for the yield. For REIT yield you can buy a dozen other REITS yielding 5%+.

[CorpRaider]

Pretty sure someone asked management and posted their response a few pages back in this thread.  Also, Mr. Lampert needs fuel for the yacht.

[DooDiligence]

Pretty sure someone asked management and posted their response a few paged back in this thread.  Also, Mr. Lampert needs fuel for the yacht.

 

 

Impressive boat (I could run it; depending on the temperament of the owners.)

 

http://www.feadship.nl/en/fleet/yacht/fountainhead-1

 

---

 

These engines do gobble up some fuel (more or less; depends on who's operating them.)

 

http://www.mtu-allison.com.ar/pdf/20V_4000_M93.pdf

[FiveSigma]

Hi,

 

I was wondering if someone with access to CMBS offering documents was kind enough to post/share the JPMCC 2015-SGP document with the annex that (see image attached to this post) excerpt from a ValueInvestorsClub report mentions.

 

I tried looking online - no dice. SRG investor relations told me that they cannot provide it to me.

 

Much appreciated.

[AJB96]

Seritage CMBS annex attached.

SRG_CMBS_Annex.xlsx

[Foreign Tuffett]

Hi,

 

I was wondering if someone with access to CMBS offering documents was kind enough to post/share the JPMCC 2015-SGP document with the annex that (see image attached to this post) excerpt from a ValueInvestorsClub report mentions.

 

I tried looking online - no dice. SRG investor relations told me that they cannot provide it to me.

 

Much appreciated.

 

I believe this document was posted earlier in this thread. The only version I have of it has been heavily modified and I'd rather not post it.

[frommi]

https://www.businesswire.com/news/home/20180227006647/en/

 

While the numbers look not that good on the first view, on a second look they are not that bad. My NAV valuation for the end of 2019 has increased by 5$ this quarter which is a lot for one quarter. Maybe the market now recognizes this as a true redevelopment story.

 

Q3 2019 NOI forecast: $232.32 (155+77.3)

Q4 2019 NOI forecast: $273.40 (155+118)

 

Q3 2019 NAV/share 50$ at 6% caprate

Q4 2019 NAV/share 55$ at 6% caprate

[Spekulatius]

https://www.businesswire.com/news/home/20180227006647/en/

 

While the numbers look not that good on the first view, on a second look they are not that bad. My NAV valuation for the end of 2019 has increased by 5$ this quarter which is a lot for one quarter. Maybe the market now recognizes this as a true redevelopment story.

 

Q3 2019 NOI forecast: $232.32 (155+77.3)

Q4 2019 NOI forecast: $273.40 (155+118)

 

Q3 2019 NAV/share 50$ at 6% caprate

Q4 2019 NAV/share 55$ at 6% caprate

 

Where do you get above numbers from? The base rents from Sears (the $155 NOI/year, I assume) are not stable, they are falling quicker right now then the rents from redevelopment projects rise, due to accelerated store closures. I would also pretty much assume that Sears by  the end of Y2019 won’t exist in it’s current form any more.

 

Also, the 6% CP rate assumption is too low. Kimco, which owns on average B properties like Sears does, trades at an almost 8% CP rate right now.I think 7% cap rate would be more realistic. Still, the redevelopments are value accrediting, but just not that much. I also predict that SRG will have to raise equity this year.

 

I like SRG, but there are a lot of headwinds to the redevelopment story.