SRG - Seritage Growth Properties

[peridotcapital]

 

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.

 

Please show us a public retail REIT comp for SRG that trades at an EV/revenue multiple of 16.75x (the midpoint of your range). It makes no sense to me.

[koshigoe]

 

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.

 

Please show us a public retail REIT comp for SRG that trades at an EV/revenue multiple of 16.75x (the midpoint of your range). It makes no sense to me.

 

If one goes back as recently as January of 2017, nowhere near the recent past heyday of REIT values, GGP, SPG both traded around 15-16 EV/rev. Granted that's not a relative trough number like today's 11-12, but for SRG it's in the realm of possibility once their property is redeveloped.

 

Even Kimco was 12.6 as recently as last summer, again not even close to its peak of the last 5 years, which was somewhere in the high teens EV/rev.

 

You factor in Aventura, Overlake, Hicksville, LaJolla, Valley View and others will be fully complete in 10 years, and you get a company on the order of GGP, SPG, not Kimco.

 

But hey, let's chop off 30%, say a fair EV/rev is 12 like a slightly undervalued kimco, you still get an EV of 11B for SRG in 2028. Lop off 4 B in debt that's 7B+ equity.  That's a 3.5 bagger not including divs in 10 years, which should be somewhere around 14% + let's say 3 for the div or 17% CAGR. This is assuming management's plan (could it be conservative?) of $25/sq foot bears out.

 

If it doesn't and things go to hell maybe stuck at $17 a square foot in ten years on 37 mil , you get 10-15% CAGR, something like that.  But that would be one strange world with 0 inflation in 10 years and a totally mismanaged SRG.

 

[BG2008]

Toys R US has 35mm US square feet. 

 

https://www.wsj.com/articles/toys-r-us-tells-workers-it-will-likely-close-all-u-s-stores-1521060803

[GCA]

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+?

 

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

[Foreign Tuffett]

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+?

 

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

 

Yes and no. Longer lead times mean that many of SRG's best properties and largest developments either haven't been begun and/or don't have SNO leases yet. You are right though, that many of SRG's worst properties, including many SHLD lease termination properties, are empty. Some of them will probably remain empty for an extended period. I don't think anyone knows what the rent per sq foot # will be in 5 or 10 years. Nor does anyone know how many sq feet of space SRG will own years from now. Over time, I would expect that some properties will probably be sold off to opportunistic local developers. Ditto for the JV properties. This will likely be somewhat offset by the "densification" of some of the higher quality properties.

 

IMO SRG's properties are worth significantly more than the current EV. The big questions are how much money can SRG raise? And on what terms? And how long will SHLD and the master lease last?

[GCA]

Yes, some of the best properties are not yet in this "projects" figure.  However, the average value of a property where a project has been done was $21MM in 2015 before the project.  The average value of a property where no project was undertaken was $8.7MM in 2015. 

The properties with no projects as yet are worth a lot less.  Thus you should expect they will have a lot less rent if they ever are redeveloped.

(Yes, these are per property values but I doubt it would change much if I took the trouble to do it by square foot).

[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+?

 

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

 

It seems that if anything 17 is much lower than what we should expect. Not sure what you mean by they have overwhelmingly done projects on higher value projects. None of their premier properties have been leased out yet, and many of the projects already completed are quite representative of remaining real estate. This question has been raised many times, so much so that Ben Schall answered it in the 2016 annual report.

 

"Brian and I often get asked whether our initial redevelopment activity was “cherry picked” in some form or

fashion; in fact, it’s quite the opposite. This first set of projects is very much representative of the breadth of our

opportunities to create outsized value across our portfolio."

 

And just to really stir things up, they expect 25 a square foot, not 17 :)

[GCA]

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+?

 

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

 

It seems that if anything 17 is much lower than what we should expect. Not sure what you mean by they have overwhelmingly done projects on higher value projects. None of their premier properties have been leased out yet, and many of the projects already completed are quite representative of remaining real estate. This question has been raised many times, so much so that Ben Schall answered it in the 2016 annual report.

 

"Brian and I often get asked whether our initial redevelopment activity was “cherry picked” in some form or

fashion; in fact, it’s quite the opposite. This first set of projects is very much representative of the breadth of our

opportunities to create outsized value across our portfolio."

 

And just to really stir things up, they expect 25 a square foot, not 17 :)

 

What I mean by "they have overwhelmingly done projects on higher value properties" is that there are 32 wholly owned properties which have done "100% recapture" projects and 198 that haven't.  Here I am looking at the list of individual projects which appears in the supplement, etc.  According to the July 2017 CMBS document, which has property by property appraisals, the average value per square foot on properties with a 100% recapture project is $130 psf, the average value per square foot on the other properties is $56.  No conjecture or assumptions from me here, just facts.  Note that there are some high-value properties like Valley View ($91 psf) and Boca Raton ($152) which do not yet appear on the "projects" list, but the list does now include other high value properties like Aventura ($735 psf) and San Diego ($245).

 

You're right on the 25, my bad.  Still, according to the list of projects and CMBS valuations, they've done projects on properties with a higher value per square foot than the rest.

[GCA]

In case you're curious (I was!), the CMBS value psf of the 19 "partial recapture" projects was $65, whereas the 179 ones with no project at all was $55.  So the properties on which the "partial recapture" projects have been performed are much closer to being representative, but still they're not quite there.

[Shane]

I tried fiddling around with the CMBS annex over lunch.  Made some general assumptions which I would appreciate some feedback on as I am not very familiar with the space.  I divided the real estate portfolio into High Value PSF, Medium Value PSF, Low Value PSF.

 

High Value (12.3%) = Cushman Stabilized Appraised Value >$100 psf, assume $40 psf rent

Medium Value (62.1%)= Cushman Stabilized Appraised Value >$30PSF & <$100 psf, assume $15 psf rent

Low Value (25.6%) = All of the rest, assume $10 psf rent.

 

This averages to ~$17psf

 

This doesn't separate the JVs or anything, quick work.

[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+?

 

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

 

It seems that if anything 17 is much lower than what we should expect. Not sure what you mean by they have overwhelmingly done projects on higher value projects. None of their premier properties have been leased out yet, and many of the projects already completed are quite representative of remaining real estate. This question has been raised many times, so much so that Ben Schall answered it in the 2016 annual report.

 

"Brian and I often get asked whether our initial redevelopment activity was “cherry picked” in some form or

fashion; in fact, it’s quite the opposite. This first set of projects is very much representative of the breadth of our

opportunities to create outsized value across our portfolio."

 

And just to really stir things up, they expect 25 a square foot, not 17 :)

 

What I mean by "they have overwhelmingly done projects on higher value properties" is that there are 32 wholly owned properties which have done "100% recapture" projects and 198 that haven't.  Here I am looking at the list of individual projects which appears in the supplement, etc.  According to the July 2017 CMBS document, which has property by property appraisals, the average value per square foot on properties with a 100% recapture project is $130 psf, the average value per square foot on the other properties is $56.  No conjecture or assumptions from me here, just facts.  Note that there are some high-value properties like Valley View ($91 psf) and Boca Raton ($152) which do not yet appear on the "projects" list, but the list does now include other high value properties like Aventura ($735 psf) and San Diego ($245).

 

You're right on the 25, my bad.  Still, according to the list of projects and CMBS valuations, they've done projects on properties with a higher value per square foot than the rest.

 

I went through the exercise as well and came up with quite different numbers. 



 

On a total square foot basis (is there a better way of doing the comparison? Perhaps using the column titled Sears/Kmart summed with Auto Center, but hey this is approx) I got:

 



100% recap projects (including terminations which are by nature 100%) 


mean $71.19 / sq ft


median $52.09 sq ft



 

for non 100% (ie: everything else yet to be redeveloped)


mean $65.90


median $48.35



 

I believe with so many outliers in the data, median is by far the more useful number.



 

As well, a simple visual inspection of the spreadsheet when sorted by appraised value / sq ft (after highlighting the 100% recaps) clearly shows this is a quite evenly distributed sample thus far in SRG's life.

 

I had to separate out the two sheets to do the calcs, but here are both sheets, with the 100% recaps and all else.

 

Also included is raw Annex if you want to do own calcs.

 

Thanks for everyone's input!

 

 

 

 

SRG_CMBS_Annex_100.xlsx

SRG_CMBS_Annex_non_100.xlsx

SRG_CMBS_Annex.xlsx

[GCA]

Dude... I think your data set is fucked up I'm sorry to say.

 

It has "Bayamon, Puerto Rico" as the highest value (Cushman stabilized) at $83MM.

It has Aventura at $8.5MM.

 

My data has Aventura at $83MM and Bayamon at $10MM... which seems much more in line with reality.

 

Given this I have to think your data set is screwed up. 

 

I went back and checked the file that was uploaded in message 498 (that has been downloaded 128 times) and it too has Bayamon really expensive and Aventura cheap.

 

Unless I'm missing something I can't avoid the conclusion that bad data was shared with everyone.  Here I will upload my copy of the raw CMBS data.

2015_July_property_by_property_SRG_CMBS_Annex.xlsx

[AJB96]

I went back and checked the attachment to post 498. The excel document did in fact have errors. I accidentally uploaded the file I had been working with instead of the original raw file. It looks like column 'BY' did not sort properly.

 

I updated the file attached to post 498 with the original CMBS annex. Sorry for any confusion. 

 

I don't think much emphasis should be put on column 'BY' titled "Cushman Stabilized Appraised Value." Using this to value the properties could lead to very misleading conclusions. For example, the Valley View Mall in Midtown Dallas was appraised at $9,267,333 back when this was a Class C mall. This property is under consideration for Amazon's HQ2 or a one million SQ FT Class A office development. Do a few Google searches. It's also been discussed previously in this thread (read the messages starting at post #461). This is one of Seritage's most valuable "Premier Properties" along with Aventura FL, La Jolla CA, Santa Monica CA, Hicksville NY, Redmond WA, etc. According to CEO Benjamin Schall's letter in the just released 2017 annual report, there are 36 "Premier Properties" in the portfolio.

 

Seritage has commenced redevelopment on 3 of their "Premier Properties" but these properties have yet to show up in the SNO lease figures.

 

Benjamin Schall's 2017 letter:

 

"As part of our announced redevelopment activity, we are now under construction on three of our premier redevelopments in Santa Monica and San Diego (La Jolla), CA and in Aventura, FL. The cumulative first phases of these three projects total over 500,000 square feet, with an expected incremental investment of approximately $300 million. These three projects generate minimal income today and are expected to generate north of $40 million of income upon stabilization – real needle movers for the Company. It is worth noting that we expect these projects, and others like them, to have future phases of development as we further activate these spectacular parcels of land."

 

That's $80 in rent PSF! Furthermore, Seritage is earning a higher return on their redevelopment investment on the "Premier Properties." These three properties are earning unlevered returns of over 13%, considerably higher than the 10-11% unlevered returns Seritage has achieved on their current redevelopment pipeline. The value of just the first phase of these 3 "Premier Properties" likely exceeds $400m after deducting the costs of redevelopment ($700m in gross value assuming $40m in annual stabalized rent at a 5.75% cap rate). That's $7 per share of value creation from just the first phase of 3 of 36 "Premier Properties."

 

2017 Annual Report with CEO Benjamin Schall's letter to shareholders:

http://www.envisionreports.com/srg/2018/2D112FE18E/234c5e1efc934721aedba9c2e654775f/Seritage_AR_3-13-18_secured.pdf

[GCA]

Sure a lot of value has been and will be created on the properties where they have done redevelopment.  What about the properties where there has been no re-development?  That's where the CMBS valuation comes in (in my mind).

 

But back to my original point... in general the nicer properties are the ones that are getting redeveloped so it would be a very bad idea to put the new redevelopment rates on the whole portfolio!

[scorpioncapital]

Good point. I think this focus on the total square footage is a distraction. It won't be anytime soon -if ever developed in full. More likely the $17/square foot on what is developed in the densified areas will increase further. Initital conditions: $4.1/square foot on the total of 27 million square foot earning (including Sears). Current condition: 7 million of the square foot is to 3rd parties earning 52% of the base rent and 20 million of poorly utilized Sears space earning the other 47%.

 

This is quite an achievement. Just 7 million is earning a bit more than the other 20 million! (plus some empty space earning nothing since the vacancy is 80%).

 

How much more of the 20 million can they develop?

Or can they grow more vertical , higher density on the existing 7 million?

I am not sure how square footage is counted. If you build vertically is this extra square footage?

 

Either way the 7 million is currently earning $15/square foot with some stabilized figure in the low 20s...

If they develop another 1/3 of the 20 million at the same $15/square foot that's going to be around $250 million in rent per year. Let's say Sears is still around for another 50 million? or the new stuff earning $50 million more over time and you get say $300 million to $400million per year. About double the rents.

 

The quesiton is if rents double over the next few years, what is the current valuation of SRG?

FFO is about say 100million now.

If it doubles that's 200million.

Equity is ~ 1.9 billion.

Final FFO will be 9x or about 10% yield.

Remember inflation should scale with this. This would be a real return. It's not bad in terms of this ultimate outcome because other stocks trading for 20 or 30x p/e when rates and inflation go up, while will also adjust upward earnings (although some companies may not be able to adjust costs downward) will still probably trade to lower P/E. They'd have to grow significantly to maintain the 20-30 P/E. A 10 P/E stock can always distribute higher dividends as REITs usually do and also may not fall as much. Say it trades at 12 or 13x...It won't be a huge return, say 37% from here but the dividend will be higher.

And this assumes a massive inflationary headwind for stocks to trade down to such low p/e.

[koshigoe]

https://www.businesswire.com/news/home/20180322005548/en/Seritage-Growth-Properties-Invesco-Real-Estate-Announce

 

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

 

The Hilco 'stabilized value' in 2015 was around 100 mil. So there should be ample opportunity to harvest more cash through refinancing in future.

 

Thanks to Alex/GCA for providing CMBS data.

2015_July_property_by_property_SRG_CMBS_Annex.xlsx

[LongTermView]

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

 

Yeah, this property is in the heart of Santa Monica and it is quite valuable: $145 million for 96,500 square feet comes to over $1,500 per square foot.

[BTShine]

https://www.businesswire.com/news/home/20180322005548/en/Seritage-Growth-Properties-Invesco-Real-Estate-Announce

 

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

 

The Hilco 'stabilized value' in 2015 was around 100 mil. So there should be ample opportunity to harvest more cash through refinancing in future.

 

Thanks to Alex/GCA for providing CMBS data.

 

 

 

Valuation of $1,500 a square foot. That’s good.

 

Any idea if Seritage stays sole owner of the parking lot?  I’d guess so, but clearly no mention of that in the press release.

 

[DTEJD1997]

https://www.businesswire.com/news/home/20180322005548/en/Seritage-Growth-Properties-Invesco-Real-Estate-Announce

 

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

 

The Hilco 'stabilized value' in 2015 was around 100 mil. So there should be ample opportunity to harvest more cash through refinancing in future.

 

Thanks to Alex/GCA for providing CMBS data.

 

 

 

Valuation of $1,500 a square foot. That’s good.

 

Any idea if Seritage stays sole owner of the parking lot?  I’d guess so, but clearly no mention of that in the press release.

 

$1,500 a square foot valuation for a large commercial/retail property?

 

What kind of rent are they going to be charging?  What kind of stores can make a profit in that location? 

 

I would think at some point in valuation...almost nothing can function and make a profit. 

 

How can a "regular" tenant sell enough product to make a profit?

 

Apple & Tiffany might be able to do it...but more "regular" mall retailers?  I've got to wonder about that.

[peridotcapital]

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

 

Yeah, this property is in the heart of Santa Monica and it is quite valuable: $145 million for 96,500 square feet comes to over $1,500 per square foot.

 

The building is going to have 130,000 sf of GLA according to the web site, so about $1,115/sf valuation. Getting $45 rents (4% cap) won't be too difficult for that property.

[GCA]

https://www.businesswire.com/news/home/20180322005548/en/Seritage-Growth-Properties-Invesco-Real-Estate-Announce

 

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

 

The Hilco 'stabilized value' in 2015 was around 100 mil. So there should be ample opportunity to harvest more cash through refinancing in future.

 

Thanks to Alex/GCA for providing CMBS data.

 

Yes, the Hilco "stabilized value" in 2015 was around 100MM which means that their analysis was...................... spot on! Given that the Invesco investment of $50MM for 50% values the property at $145MM after construction costs are taken into account... i.e. $50MM for 50% = $100MM of value today plus $45MM of construction costs = $145MM

 

Am I missing anything here?

[koshigoe]

You're ignoring the Hilco lease up costs of 24 mil to get to the 100 mil. (no free lunch here!)

 

They got the 100 mil valuation basis before spending (most of) the money.

 

 

Hilco theory said:

 

53 mil acquired

24 mil lease up

 

= 99.2 mil stabilized value back

 

total 99.2 mil SRG ownership on 77 mil investment 28% return

 

What happened:

 

53 mil acquired

 

sell half get 50 mil value back

 

put in 22.5 mil lease up

 

get 145/2 = 72.2 stabilized value back

 

total 72.2 mil SRG ownership on 25.5 mil investment 183% return

 

These numbers indicate to me that 1) Hilco greatly underestimates SRG's value enhancing abilities through creative JV and leveraging of cheap land acquisition price 2) SRG has an enormous margin of safety at present price, or even a more reasonable 40-45 a share.

 

[GCA]

Or pretending Invesco never came in:

 

53 MM acquired

45 MM "lease up" (though probably more because they've been working on this property for a while)

=

145 MM of stabilized value

 

total 145 MM SRG ownership on 98 MM investment, or 48% return

 

Thanks

[koshigoe]

Yes, I agree with you on a wholly owned basis it's not nearly as eye-popping. Though being off by 20% (it will be more because there's planned 2nd phase converting the parking lot) on a commercial real estate valuation usually makes one party of the transaction a pretty big winner, i.e: Seritage.

 

Could one imagine the JV potential on a Valley View site, or the Aventura mall? They could potentially extract several hundred million from just those two redevs, essentially horse trading their way into a position where they get 50% of massive real estate projects for just some incremental lease up costs. JVing it seems really leverages the returns on any cash investment made by them.

 

It seems SRG is getting paid like a consultant, do all the dirty work then get a big pay day after all the development hurdles are finished. The JV on Santa Monica was announced only when it finally got through the Coastal Commission, the last step.

 

 

 

 

[GCA]

These numbers indicate to me that 1) Hilco greatly underestimates SRG's value enhancing abilities through creative JV and leveraging of cheap land acquisition price 2) SRG has an enormous margin of safety at present price, or even a more reasonable 40-45 a share.

 

Yes, it would definitely appear Hilco greatly underestimated the Santa Monica property... though I'm not sure what this implies about the rest of the portfolio given Santa Monica is obviously special.

 

Again, unless Santa Monica is representative, I'm not sure how you get to a total portfolio valuation which is necessary for a margin of safety.