SRG - Seritage Growth Properties

[Spekulatius]

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.

 

Well, SRG pretty much trades at the price the old man bought it two years ago, so that is a start.

[peridotcapital]

As cap rates rise it gets harder to see where the value in SRG is.

 

Kimco owns 67.9M sf, gets $16 rent/sf, and trades at an E/V of $12.0B ($176/sf)

 

Seritage owns 37.3M sf, gets $7 rent/sf, and trades at an E/V of $3.3B ($89/sf)

 

At 2017 leasing velocity the portfolio is Sears-free in 10 years and SRG equity goes from $35 to $70 per share. Assuming it happens as planned, investors will earn 7%/year plus dividends, so call it 10%/year. Why not just buy Kimco with its 7.7% dividend yield and probably earn roughly same return without having to rely on the company finding new tenants for 60% of its GLA over the next decade?

 

 

[NBL0303]

As cap rates rise it gets harder to see where the value in SRG is.

 

Kimco owns 67.9M sf, gets $16 rent/sf, and trades at an E/V of $12.0B ($176/sf)

 

Seritage owns 37.3M sf, gets $7 rent/sf, and trades at an E/V of $3.3B ($89/sf)

 

At 2017 leasing velocity the portfolio is Sears-free in 10 years and SRG equity goes from $35 to $70 per share. Assuming it happens as planned, investors will earn 7%/year plus dividends, so call it 10%/year. Why not just buy Kimco with its 7.7% dividend yield and probably earn roughly same return without having to rely on the company finding new tenants for 60% of its GLA over the next decade?

 

Good points.  Is Kimco the cheapest REIT of this kind that you know of or are there other cheap options as well?

[Spekulatius]

As cap rates rise it gets harder to see where the value in SRG is.

 

Kimco owns 67.9M sf, gets $16 rent/sf, and trades at an E/V of $12.0B ($176/sf)

 

Seritage owns 37.3M sf, gets $7 rent/sf, and trades at an E/V of $3.3B ($89/sf)

 

At 2017 leasing velocity the portfolio is Sears-free in 10 years and SRG equity goes from $35 to $70 per share. Assuming it happens as planned, investors will earn 7%/year plus dividends, so call it 10%/year. Why not just buy Kimco with its 7.7% dividend yield and probably earn roughly same return without having to rely on the company finding new tenants for 60% of its GLA over the next decade?

 

Good points.  Is Kimco the cheapest REIT of this kind that you know of or are there other cheap options as well?

 

Depends on how you define cheap .KIM peers are DDR, KRG, BRX. All of them are either cheap or well disguised value traps. I would rate KIM to be the highest quality of the bunch

 

The big issue are deflationary trends on rents over the long run due to online gaining share.

[BTShine]

The factor I’m most concerned with is will humans find a use for space outside the home going forward?  Our civilization has repurposed real estate many times in our history and I believe this retail space will be repurposed, too.  What will the rents be?  That’s the only question I care about.

 

My guess is much of that depends upon construction costs.  Replacement costs and cost of construction in general, since the cost of constructing other buildings will always compete against vacant space. 

 

Mega churches.  Restaurants.  Universities.  Office space.  All of those users are candidates in the future (for any failed properties, of course).  What will they pay? 

 

Retailers getting beat by Amazon are not the only candidates to tenant this type of property. 

[Spekulatius]

Repurposing of retail space will happen,  but I think not all the retail space can be repurposed. In some cases, the cost of tear down and rebuild may be very high and will result in a huge economic loss for the owner

[scorpioncapital]

They need to convert their thinking. Yes, I heard about the office space in the Santa Monica property and the mixed use project in Texas BUT SRG needs to become say 60% of this and 40% retail/entertainment/services. From what I see of the tenant roster, it's too much shift from SRG to just pure retail again. Sure it's better but the real reason SRG or any REIT like this would be a killer investment is the pivot away from retail into more productive uses. Even 'other' retail is not as productive as it could be.

[DTEJD1997]

Hey all:

 

Unless ALL of SRG's properties are "super prime" I have a hard time seeing how they will be valued higher than other retail REIT's.

 

Just look at all the carnage going on with the retail REIT sector, and none of that is going to effect SRG?

 

Add on top of that their huge need for capital to redo/re-purpose their properties.  That is an added layer of complexity/risk.

 

Then you've got a rising interest rate environment.  Rising rates should hit 5% cap rate properties/projects high than it hits 10% cap rates.

 

I think SRG could do OK in the long run, I just think they are overpriced currently in relation to the RISK and some of their other competitors.

[Spekulatius]

Hey all:

 

Unless ALL of SRG's properties are "super prime" I have a hard time seeing how they will be valued higher than other retail REIT's.

 

Just look at all the carnage going on with the retail REIT sector, and none of that is going to effect SRG?

 

Add on top of that their huge need for capital to redo/re-purpose their properties.  That is an added layer of complexity/risk.

 

Then you've got a rising interest rate environment.  Rising rates should hit 5% cap rate properties/projects high than it hits 10% cap rates.

 

I think SRG could do OK in the long run, I just think they are overpriced currently in relation to the RISK and some of their other competitors.

 

If the properties were super prime (or even prime), the newlly redeveloped properties would generate more than $17/sqft. $17/sqft is a B-mall Rents, no less and no more. So, I think we can safely assume that Sears properties are on average B-mall properties.

i think the rents for B-mallet DDR and KIM are around $16/sqft but that includes properties with below market rents. KIM and DDR are B-mall Reits.

[koshigoe]

37 mil x $17 = 629

 

629 / 0.06 = 10,483

 

2 to 10.4 in 10 years is ~18%

 

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

 

[peridotcapital]

37 mil x $17 = 629

 

629 / 0.06 = 10,483

 

2 to 10.4 in 10 years is ~18%

 

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

 

You are saying SRG equity is worth $10.5B in 10 years? You seem to be assuming they have zero debt right now and never raise capital ever again.

[peridotcapital]

 

Good points.  Is Kimco the cheapest REIT of this kind that you know of or are there other cheap options as well?

 

There are cheaper REITs (WPG as an example) but Kimco's rents are nearly identical to what SRG is doing on redevelopments, so its my preferred comp.

[rb]

37 mil x $17 = 629

 

629 / 0.06 = 10,483

 

2 to 10.4 in 10 years is ~18%

 

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

 

You are saying SRG equity is worth $10.5B in 10 years? You seem to be assuming they have zero debt right now and never raise capital ever again.

Another issue is whether current rent levels are sustainable. What happens if another Sears like department store goes out of business? That's not exactly a crazy idea. If a lot of supply comes to market will there be enough tenants to fill the space? And if there are would the rents hold at current levels given the new sopply?

[BTShine]

37 mil x $17 = 629

 

629 / 0.06 = 10,483

 

2 to 10.4 in 10 years is ~18%

 

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

 

Koshigoe,

 

Where did you learn that they expect rents to be $25 in the future?  That's very interesting information. 

[koshigoe]

top page 14 on the supplement.  1,066 k in total cost for redevelopment, 6.197 k square feet, expected $25 / sq ft once stabilized, IE current tenants pay higher rates.

 

most of redev capital should be debt, shouldn't change the fact that equity will go from 2 B to 10 B over a ten year stretch.  So they go from 1.3 B to 5 B in debt over time, shouldn't change the overall return much.  Yeah lots of weird things could happen over ten years with interest rates etc. But the rough numbers are in the ballpark. And the bears main concern is a peanuts short-term shortfall of 30-100m. The fear doesn't match the reality it seems.

 

Also, the other companies that were mentioned, DDR and WPG for a couple. I think some underestimate the unique situation of SRG. SRG has majority eccentric billionaire owner, proven no-frills  leadership team and they're executing with first mover advantage. They have a unique profile of land in nearly every state, and many trophy properties. They're nearly through permitting for several mixed use sites at Asheville, Overlake, and Hicksville.  To lump SRG with DDR and WPG is sort of an insult to the unique character of SRG assets and operational execution so far, in my opinion! But hey, bet with the $$.

 

 

[CorpRaider]

Are you putting a 6% cap rate on their total gross rents (as projected)?

[Spekulatius]

top page 14 on the supplement.  1,066 k in total cost for redevelopment, 6.197 k square feet, expected $25 / sq ft once stabilized, IE current tenants pay higher rates.

 

most of redev capital should be debt, shouldn't change the fact that equity will go from 2 B to 10 B over a ten year stretch.  So they go from 1.3 B to 5 B in debt over time, shouldn't change the overall return much.  Yeah lots of weird things could happen over ten years with interest rates etc. But the rough numbers are in the ballpark. And the bears main concern is a peanuts short-term shortfall of 30-100m. The fear doesn't match the reality it seems.

 

Also, the other companies that were mentioned, DDR and WPG for a couple. I think some underestimate the unique situation of SRG. SRG has majority eccentric billionaire owner, proven no-frills  leadership team and they're executing with first mover advantage. They have a unique profile of land in nearly every state, and many trophy properties. They're nearly through permitting for several mixed use sites at Asheville, Overlake, and Hicksville.  To lump SRG with DDR and WPG is sort of an insult to the unique character of SRG assets and operational execution so far, in my opinion! But hey, bet with the $$.

 

The same eccentric billionaire owner has run Sears into the ground, so I think his acumen needs to be discounted somewhat. WPG is a Bad example since they own C malls (on average). KIM is a better proxy, except that they have  fully cash flowing properties right now, with the option to redevelop, while SRG needs to redevelop their entire real estate quickly,or they will sit on unproductive assets. KIM can take a more measured approach to redevelopment, since their properties are mostly cash flowing and will be for a while. I think it is a fair question, KIM may offer a similar total return Thant SRG at a lower risk.

[Compounder]

While most seem to be focused on the $17 average signed so far, on the large projects that are already underway stabilized rents of nearly $40 per sqf are expected.

[CorpRaider]

I thought KIM owned no malls; only open air shopping centers. 

[Gilp]

What basically is the difference business wise, between open air shopping centers and malls?

[FiveSigma]

Fresh air?  ;D

[peridotcapital]

I thought KIM owned no malls; only open air shopping centers.

True, but if we assume that rents in large part correlate to traffic and sales generation, then similar rents, regardless of enclosed or not, should indicate similar property values. I threw out WPG because they get similar rents and have both enclosed and strip centers.

[peridotcapital]

top page 14 on the supplement.  1,066 k in total cost for redevelopment, 6.197 k square feet, expected $25 / sq ft once stabilized, IE current tenants pay higher rates.

 

most of redev capital should be debt, shouldn't change the fact that equity will go from 2 B to 10 B over a ten year stretch.  So they go from 1.3 B to 5 B in debt over time, shouldn't change the overall return much.  Yeah lots of weird things could happen over ten years with interest rates etc. But the rough numbers are in the ballpark. And the bears main concern is a peanuts short-term shortfall of 30-100m. The fear doesn't match the reality it seems.

 

Also, the other companies that were mentioned, DDR and WPG for a couple. I think some underestimate the unique situation of SRG. SRG has majority eccentric billionaire owner, proven no-frills  leadership team and they're executing with first mover advantage. They have a unique profile of land in nearly every state, and many trophy properties. They're nearly through permitting for several mixed use sites at Asheville, Overlake, and Hicksville.  To lump SRG with DDR and WPG is sort of an insult to the unique character of SRG assets and operational execution so far, in my opinion! But hey, bet with the $$.

 

I don't get why the amount of debt they have only has a minimal impact on the equity value. It is quite odd to ignore debt when valuing a REIT. How SRG would ever command a $15B E/V, even at $25 rents, is beyond me. That's a valuation of like $400 per sf.

[CorpRaider]

What basically is the difference business wise, between open air shopping centers and malls?

 

Well the spin, at least, is that open air shopping centers are located based existing live-work traffic patterns and include a large slug of "neighborhood" convenience type centers and generally are more centered around impulse, convenience, and daily living maintenance stuff (i.e., popping into gym or getting hair or nails done).  I guess the worst case comparison would be with a mall in suburbia hell that was built with department stores as the attraction and large parking garages centered around said department stores, where all the rent comes from the smaller tenants based on the formerly compelling anchors and with like a 75% exposure to apparel. 

 

So Kimco has been highlighting a chart with their tenants with over 1% of Annual Base Rent the past few quarters and 3.5% of their ABR (and two of their top 14 are grocers) and there are no department stores in that top 14.

 

So if you think this is really a bloodbath for department stores and apparel (or just malls in general....they were always fresh hell if you weren't a power retail shopper, imop), not retail writ large, you might have a variant perception on at least some of the non mall retail REITs.

 

I read something the other day that said it takes 4x as many SF to effect online retail versus traditional (most of which is warehouse, at least for now) because of the different in shipping parcels versus pallets.  Makes sense to me and will probably matter at some point.

 

Yeah peridot, I see your logic on using it for a comp.

[koshigoe]

top page 14 on the supplement.  1,066 k in total cost for redevelopment, 6.197 k square feet, expected $25 / sq ft once stabilized, IE current tenants pay higher rates.

 

most of redev capital should be debt, shouldn't change the fact that equity will go from 2 B to 10 B over a ten year stretch.  So they go from 1.3 B to 5 B in debt over time, shouldn't change the overall return much.  Yeah lots of weird things could happen over ten years with interest rates etc. But the rough numbers are in the ballpark. And the bears main concern is a peanuts short-term shortfall of 30-100m. The fear doesn't match the reality it seems.

 

Also, the other companies that were mentioned, DDR and WPG for a couple. I think some underestimate the unique situation of SRG. SRG has majority eccentric billionaire owner, proven no-frills  leadership team and they're executing with first mover advantage. They have a unique profile of land in nearly every state, and many trophy properties. They're nearly through permitting for several mixed use sites at Asheville, Overlake, and Hicksville.  To lump SRG with DDR and WPG is sort of an insult to the unique character of SRG assets and operational execution so far, in my opinion! But hey, bet with the $$.

 

I don't get why the amount of debt they have only has a minimal impact on the equity value. It is quite odd to ignore debt when valuing a REIT. How SRG would ever command a $15B E/V, even at $25 rents, is beyond me. That's a valuation of like $400 per sf.

 

 

It is not higher math:

 

37 mil x $25/sq ft = 925

 

925 / 0.06 = 15416

 

but thats equity, not enterprise value.

 

if solid REIT makes 925 mil a year the equity won't trade at 15416 - 4 or 5 B debt = 10 or 11 B...that's 10% cap rate. edit: this is too aggressive, knock off some 20% for op costs, etc...but you're still something in the ballpark of 10-13 B equity (14-17 B enterprise) in a decade.

 

so with just reasonable assumptions, SRG could quite easily be a 5x in 10 years. and this doesn't include the sure to be increasing dividends over that time frame.

 

edit: also wanted to comment on Kimco, that company is loaded with debt, which will only serve to handcuff them in the future with opportunities and redev. SRG doesn't have this legacy baggage, like tie ups with Albertsons and lots of debt. THey've got a clean sheet, and I think that is a nontrivial advantage when competing with these legacy REITS. In fact, Schall even mentioned so in the annual letter, that one of SRG competitive advantage lay in having a clean sheet to work with at properties.