SRG - Seritage Growth Properties

[koshigoe]

SRG has contractual right to sell back JVs to Simon, Mac, GGP in 3-6 weeks.  It seems looking at the fine print they need to have met certain leasing occupancy, but all the JVs are fully leased (albeit to Sears).  This could be source of 300m if need arises.

[frommi]

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.

 

In the link i posted is a table with "Projected Annual Income", there you can see the expected incremental rent. And when they sell JV to Simon for caprates of ~5.2% i assume that the rest of the portfolio is not worth much less. Of course i know whats going on in the REIT space, there are lots of other good opportunities there. SRG has cash of $415 million and needs ~$800 million to the end of 2019, while they can sell the JV (currently valued at $280 million) so the funding gap to 2019 is around $100 million right now.

The risks i see is that they are not able to lease out all of the additional space and that caprates in the private market go up. Maybe i was to optimistic with my position sizing and after having slept not that well i will probably reduce my position today. Concentration is really not my game. :)

[Spekulatius]

 

In the link i posted is a table with "Projected Annual Income", there you can see the expected incremental rent. And when they sell JV to Simon for caprates of ~5.2% i assume that the rest of the portfolio is not worth much less. Of course i know whats going on in the REIT space, there are lots of other good opportunities there. SRG has cash of $415 million and needs ~$800 million to the end of 2019, while they can sell the JV (currently valued at $280 million) so the funding gap to 2019 is around $100 million right now.

The risks i see is that they are not able to lease out all of the additional space and that caprates in the private market go up. Maybe i was to optimistic with my position sizing and after having slept not that well i will probably reduce my position today. Concentration is really not my game. :)

 

I know where the additional NOI is coming from - roughly $115M annually from the $1.1B Development pipeline, but I think assuming that the base NOI of $155M is stable if far of base. the base NOI is dropping quickly, right now even quicker than development pipeline completions add to it. That is why the NOI is falling right and and I think it might keep falling until the pipeline Ames their way through and the Sears store closing abate or more likely, when they are all closed. Thus, total NOI will be much smaller than the $273M number you cited for Q4 2019, IMO.

 

I didn’t know about the 5.2% Cap rate on their JV properties to SPG, but I think those are A property locations and hand selected by SPG (some are in SPG existing malls), so I don’t think they are representative of SRG portfolio.

 

SRG on average are B mall locations, the $17/sqft rent on completed redevelopment properties tells us that much.

 

I don’t think that SRG is a bad bet, but there does seem to be a cash shortfall. selling JV properties will improve their balance sheet, but selling rented assets will also lower the NOI, so it is not that straightforward of a case. I am watching this and I think we might see prices that are better than what WEB paid for his stock somewhere down the road.

[DanielGMask]

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

 

Coatailing is always dangerous ‘cause it makes the coatailer less suspicious. I’m a shareholder and I’m increasing my position at current prices, but I dont’t think this is a fast trade, it will take years for the underlying value to surface and it’s not sure thing!

[Shane]

Agree that an equity raise seems more and more likely.  If the shares react poorly, the best time to buy might be when they announce it.

 

Has anyone done a deep dive into the quality of the properties?  I have a friend in commercial real estate who has mentioned that they have a number of 'garbage' properties which he has looked at.

[LongTermView]

The '17 10-K says the following on page 46:

Pursuant to the provisions of the Master Lease and many third-party leases, the Company is entitled to be reimbursed for certain property related expenses.  For the years ended December 31, 2017 and December 31, 2016, the Company recorded tenant reimbursement income of $62.5 million and $62.3 million, respectively, compared to property operating expenses and real estate tax expense aggregating of $65.3 million and $65.2 million, respectively.

 

Page F-22 shows $51.7 million in tenant reimbursements from the master lease. Does that mean third-party tenants paid reimbursements of $10.8 million or $62.5 million minus $51.7 million? What is the $10.5 million unearned tenant reimbursements line on page F-35?


[Foreign Tuffett]

Agree that an equity raise seems more and more likely.  If the shares react poorly, the best time to buy might be when they announce it.

 

Has anyone done a deep dive into the quality of the properties?  I have a friend in commercial real estate who has mentioned that they have a number of 'garbage' properties which he has looked at.

 

They are going to have to raise more cash in the near future. I agree with you that an equity raise is possible. Another possibility is that they negotiate a new, larger mortgage loan. The yield maintenance provision on their current mortgage loan expires in about a week, so we may be hearing something soon. 

 

Some of their properties are definitely "garbage." Some are quite valuable. There is a table near the end of the 10-K that lays out SRG's acquisition cost for each property. It's a pretty good guide to the properties' relative values (aka their values relative to each other).

[frommi]

Coatailing is always dangerous ‘cause it makes the coatailer less suspicious. I’m a shareholder and I’m increasing my position at current prices, but I dont’t think this is a fast trade, it will take years for the underlying value to surface and it’s not sure thing!

 

Thanks, i am guilty. Thinking about it it is funny that i got lured into this "growth" investment just because Buffet is involved. I should just stick to my quant models, i feel much more comfortable there.

[forest81]

Does Buffett still have this in his personal portfolio? On the major owners register I can't see him listed anywhere?

[scorpioncapital]

I see the 13g from dec 2015 under his name...but are 13g's necessary to be filed if there is no change?

[Spekulatius]

Coatailing is always dangerous ‘cause it makes the coatailer less suspicious. I’m a shareholder and I’m increasing my position at current prices, but I dont’t think this is a fast trade, it will take years for the underlying value to surface and it’s not sure thing!

 

Thanks, i am guilty. Thinking about it it is funny that i got lured into this "growth" investment just because Buffet is involved. I should just stick to my quant models, i feel much more comfortable there.

 

One rule in investing is to never coattail. It doesn’t matter who you coattail, but I have personally found that it never works.  Now, I use other investor buys as an idea generator, but I would never buy a stock that falls out of my own comfort zone, just because somebody else does.

 

I feel the rule to never ever coattail should be written in stone.

 

I might buy SRG at some point down the road, but I think I will get the same, if not a better rice than Buffet.

[DanielGMask]

Coatailing is always dangerous ‘cause it makes the coatailer less suspicious. I’m a shareholder and I’m increasing my position at current prices, but I dont’t think this is a fast trade, it will take years for the underlying value to surface and it’s not sure thing!

 

Thanks, i am guilty. Thinking about it it is funny that i got lured into this "growth" investment just because Buffet is involved. I should just stick to my quant models, i feel much more comfortable there.

 

One rule in investing is to never coattail. It doesn’t matter who you coattail, but I have personally found that it never works.  Now, I use other investor buys as an idea generator, but I would never buy a stock that falls out of my own comfort zone, just because somebody else does.

 

I feel the rule to never ever coattail should be written in stone.

 

I might buy SRG at some point down the road, but I think I will get the same, if not a better rice than Buffet.

 

[scorpioncapital]

I thought I saw what Buffett saw in SRG too, and I still do. However now I suspect it's more of a roller coaster ride q to q...likewise, probably slower pace than expected. I remember he said at the annual he thought SRG would do just fine, but BRK would do even better. Of course this doesn't take purchase price into consideration and today at $36 I think it may be roughly equal to his purchase price 2 years ago. Guess he's a patient guy :)

[beaufort]

Berkowitz controlled in his 3 funds as of Nov 30, 2017 according to his report dated Feb 1, 2018:

1.  Fairholme 2185,580;

2.  Income fund 568,000;

3.  Allocation fund 687,318.

 

Has anyone done a count on how many shares he's disposed of since the above date?

 

[Foreign Tuffett]

Does anyone have the most recent Boenning & Scattergood report on SRG? Barring that, a summary of its contents would also be much appreciated.

[Sunrider]

Does anyone have the most recent Boenning & Scattergood report on SRG? Barring that, a summary of its contents would also be much appreciated.

 

.. would also appreciate a copy via PM.

Thanks!

[beaufort]

Does anyone have the most recent Boenning & Scattergood report on SRG? Barring that, a summary of its contents would also be much appreciated.

 

.. would also appreciate a copy via PM.

Thanks!

 

I would also like a copy.

[forest81]

Small position here. Thinking of making it a large position. I am not sure I get why the market is in such a flap about this. I mean essentially the story is still the same $4 square foot into $17. It may take ten years but then it will be a treble roughly dependent on valuation. I think maybe Berkowitz forced liquidation maybe forcing the price down creating an attractive price? The only thing that concerns me is potential dilution to raise funds for the redevelopment. Surely they could raise funds from somewhere else other than diluting????

[Spekulatius]

The path to get to. $17/Sqft is tougher than initially thought , but more importantly cap rates appear to be dropping due to retail malaise and higher interest rates. I don’t really have a hard time envisioning cap rates of 8% for B-malls, which is essentially what you are getting when buying KIM right now.

 

Many will question the need to take on development risk like with SRG, when you can buy fully developed properties cheap as well.

[CorpRaider]

Looking at Kim too?  Did you catch that Patrick O-Shag-Hennessy podcast with those Sorin Capital dudes? 

[dutchman]

were it not for buffet, I think a lot of us would have no interest in this

[scorpioncapital]

If you ignore the Sears base rental income drop which is a known factor, non-Sears rental revenue went up like 35% in 2017. A few more years like that and it will become very evident.

[Foreign Tuffett]

were it not for buffet, I think a lot of us would have no interest in this

 

You're making me hungry with this "buffet" talk

[zippy1]

were it not for buffet, I think a lot of us would have no interest in this

 

You're making me hungry with this "buffet" talk

re-purpose to eatery?!  ;)

[NBL0303]

were it not for buffet, I think a lot of us would have no interest in this

 

If it were not for Buffett's position, perhaps the share price would be substantially lower, and then some of us would be very interested in it at a certain price.