SRG - Seritage Growth Properties

[LongTermView]

Found the answer to my question from the other day. Looking at pages 19 and 20 of the 2Q18 supplemental, much of the 18.7% of GLA that is not leased is not under development. Here are the properties with termination dates before August 2018 that are not currently being developed:

 

Square Feet Property

  118,200 Alpena, MI

  118,800 Chicago, IL (S Kedzie)

    96,600 Deming, NM

    87,800 Manistee, MI

    94,800 Riverton, WY

    92,700 Sault Sainte Marie, MI

  187,179 Chapel Hill, OH

  137,499 Concord, NC

    79,102 Detroit Lakes, MN

    94,885 Elkins, WV

    96,066 Kenton, OH

  112,505 Kissimmee, FL

    90,010 Layton, UT

    76,853 Leavenworth, KS

    87,500 Muskogee, OK

    68,334 Owensboro, KY

    94,841 Platteville, WI

    94,500 Riverside, CA (Iowa Ave.)

    72,511 Sioux Falls, SD

  161,700 Burnsville, MN

  293,700 Chicago, IL (N Harlem)

  155,100 Johnson City, NY

  194,900 Lafayette, LA

  208,700 Mentor, OH

  351,600 Middleburg Heights, OH

  215,000 Overland Park, KS

  204,500 Sarasota, FL

  209,900 Toledo, OH

    82,000 York, PA

  166,000 Friendswood, TX

  215,000 Westwood, TX

-----------

4,358,785

 

4,358,785/36,390,000 is 12%.

 

[GCA]

Here let me stir up some trouble:  I think this move is overblown... all they did was refinance their debt!  And not on fantastic terms for SRG!  The move is a short squeeze and the price will float back down to the low $40s until some real news comes out.

 

Please explain how extending the loan 4 years at 0.5% increase in rates, removing the requirement to repay mortgage loans with asset sale proceeds, and closing the liquidity gap needed to fund redevelopments, is not real news. Thank you.

 

Good points.  It's news, I just never thought that liquidity / ability to obtain financing was the biggest issue with SRG.

I have thought the more impactful news flow items would be around 1) pace of redevelopment 2) economic of redevelopment.

 

Mostly I just wanted people to stop posting about conflicts of interest

[BTShine]

Here let me stir up some trouble:  I think this move is overblown... all they did was refinance their debt!  And not on fantastic terms for SRG!  The move is a short squeeze and the price will float back down to the low $40s until some real news comes out.

 

Please explain how extending the loan 4 years at 0.5% increase in rates, removing the requirement to repay mortgage loans with asset sale proceeds, and closing the liquidity gap needed to fund redevelopments, is not real news. Thank you.

 

Good points.  It's news, I just never thought that liquidity / ability to obtain financing was the biggest issue with SRG.

I have thought the more impactful news flow items would be around 1) pace of redevelopment 2) economic of redevelopment.

 

Mostly I just wanted people to stop posting about conflicts of interest

 

I think those two factors you listed were major items, but since there wasn’t good clarity going forward for their financing (where from, what terms/rate/duration) their capital needs and source was the last question mark. Up to this point financings were either from Eddie Lampert at ugly terms for SRG (not ideal) or a small inadequate preferred stock offering that’s trading at a high(ish) yield.  $2B is a huge number and the rate is fine.  It moves SRG in the right direction compared to the preferred and ESL financings.  Also, Buffett is very much an unbiased 3rd party investor in this situation (I know the COI debating people here will disagree. Thaft’s fine).  And his stamp of approval not only removes the financing fears it actually transitions SRG investors into greater confidence since Warren Buffett (or his co-workers) believe in SRG.  Mr. Buffett and his crew have been wrong in the past, but rarely.  Most often they are shrewd and successful.

[GCA]

Found the answer to my question from the other day. Looking at pages 19 and 20 of the 2Q18 supplemental, much of the 18.7% of GLA that is not leased is not under development. Here are the properties with termination dates before August 2018 that are not currently being developed:

 

Square Feet Property

  118,200 Alpena, MI

  118,800 Chicago, IL (S Kedzie)

    96,600 Deming, NM

    87,800 Manistee, MI

    94,800 Riverton, WY

    92,700 Sault Sainte Marie, MI

  187,179 Chapel Hill, OH

  137,499 Concord, NC

    79,102 Detroit Lakes, MN

    94,885 Elkins, WV

    96,066 Kenton, OH

  112,505 Kissimmee, FL

    90,010 Layton, UT

    76,853 Leavenworth, KS

    87,500 Muskogee, OK

    68,334 Owensboro, KY

    94,841 Platteville, WI

    94,500 Riverside, CA (Iowa Ave.)

    72,511 Sioux Falls, SD

  161,700 Burnsville, MN

  293,700 Chicago, IL (N Harlem)

  155,100 Johnson City, NY

  194,900 Lafayette, LA

  208,700 Mentor, OH

  351,600 Middleburg Heights, OH

  215,000 Overland Park, KS

  204,500 Sarasota, FL

  209,900 Toledo, OH

    82,000 York, PA

  166,000 Friendswood, TX

  215,000 Westwood, TX

-----------

4,358,785

 

4,358,785/36,390,000 is 12%.

 

Interestingly in addition to "terminated" properties where there is no redevelopment, there are also a growing number of "recaptured" properties where there is no announced redevelopment (and ostensibly no leases either).  Cross reference the recapture list (in the 10-Q) with the project list.  I count this at about 2.2MM GLA.  It includes some of the best properties (Valley View, Hicksville, Boca Raton, Redmond).

 

This whole situation is rather surprising.  Why "recapture" and kick out a paying tenant if you're not ready to redevelop?  I suspect the answer is that they're actually doing pre-re-development work and they're just not on the list... but they could be ready to go on the redevelopment list at any moment (or rather whenever they do those end of quarter pre-releases).

[LongTermView]

Interestingly in addition to "terminated" properties where there is no redevelopment, there are also a growing number of "recaptured" properties where there is no announced redevelopment (and ostensibly no leases either).  Cross reference the recapture list (in the 10-Q) with the project list.  I count this at about 2.2MM GLA.  It includes some of the best properties (Valley View, Hicksville, Boca Raton, Redmond).

 

This whole situation is rather surprising.  Why "recapture" and kick out a paying tenant if you're not ready to redevelop?  I suspect the answer is that they're actually doing pre-re-development work and they're just not on the list... but they could be ready to go on the redevelopment list at any moment (or rather whenever they do those end of quarter pre-releases).

 

I think you're right, GCA. I'm guessing that the planning process can be extensive and that it is much easier to plan redevelopment once Sears is out of the property.

[bci23]

Found the answer to my question from the other day. Looking at pages 19 and 20 of the 2Q18 supplemental, much of the 18.7% of GLA that is not leased is not under development. Here are the properties with termination dates before August 2018 that are not currently being developed:

 

Square Feet Property

  118,200 Alpena, MI

  118,800 Chicago, IL (S Kedzie)

    96,600 Deming, NM

    87,800 Manistee, MI

    94,800 Riverton, WY

    92,700 Sault Sainte Marie, MI

  187,179 Chapel Hill, OH

  137,499 Concord, NC

    79,102 Detroit Lakes, MN

    94,885 Elkins, WV

    96,066 Kenton, OH

  112,505 Kissimmee, FL

    90,010 Layton, UT

    76,853 Leavenworth, KS

    87,500 Muskogee, OK

    68,334 Owensboro, KY

    94,841 Platteville, WI

    94,500 Riverside, CA (Iowa Ave.)

    72,511 Sioux Falls, SD

  161,700 Burnsville, MN

  293,700 Chicago, IL (N Harlem)

  155,100 Johnson City, NY

  194,900 Lafayette, LA

  208,700 Mentor, OH

  351,600 Middleburg Heights, OH

  215,000 Overland Park, KS

  204,500 Sarasota, FL

  209,900 Toledo, OH

    82,000 York, PA

  166,000 Friendswood, TX

  215,000 Westwood, TX

-----------

4,358,785

 

4,358,785/36,390,000 is 12%.

 

Interestingly in addition to "terminated" properties where there is no redevelopment, there are also a growing number of "recaptured" properties where there is no announced redevelopment (and ostensibly no leases either).  Cross reference the recapture list (in the 10-Q) with the project list.  I count this at about 2.2MM GLA.  It includes some of the best properties (Valley View, Hicksville, Boca Raton, Redmond).

 

This whole situation is rather surprising.  Why "recapture" and kick out a paying tenant if you're not ready to redevelop?  I suspect the answer is that they're actually doing pre-re-development work and they're just not on the list... but they could be ready to go on the redevelopment list at any moment (or rather whenever they do those end of quarter pre-releases).

 

Those 4 you call out are almost certainly going to be very large projects with a "premiere" designation similar to Aventura FL and Dallas Midtown. Obviously those require more time to commence/plan.

[pcm983]

https://seekingalpha.com/article/4196019-seritage-compelling-opportunity-invest-alongside-warren-buffett-amidst-busted-short-thesis

 

[BTShine]

Is there anything in that article that hasn’t been discussed on here?  There’s a paywall. 

[pcm983]

Sorry about that. I believe there is a paywall for a week then it should be accessible. Not necessarily. Crux of thesis is this worth 80 if you take SPG as a comp and add in the 160 psf development cost. Also explains why srg short thesis has been completely disproven. It is pretty crazy how this stock is still so heavily shorted despite the short thesis being wrong for 3 yrs. SHLD has yet to file and the liquidity concerns have been completely ameliorated.

[BTShine]

Sorry about that. I believe there is a paywall for a week then it should be accessible. Not necessarily. Crux of thesis is this worth 80 if you take SPG as a comp and add in the 160 psf development cost. Also explains why srg short thesis has been completely disproven. It is pretty crazy how this stock is still so heavily shorted despite the short thesis being wrong for 3 yrs. SHLD has yet to file and the liquidity concerns have been completely ameliorated.

 

Not a problem!  I look forward to reading it when the paywall is removed. 

 

What cap rate are you using?  And how long do you assume the redevelopment of SRG's land portfolio will take?

[peridotcapital]

Sorry about that. I believe there is a paywall for a week then it should be accessible. Not necessarily. Crux of thesis is this worth 80 if you take SPG as a comp and add in the 160 psf development cost. Also explains why srg short thesis has been completely disproven. It is pretty crazy how this stock is still so heavily shorted despite the short thesis being wrong for 3 yrs. SHLD has yet to file and the liquidity concerns have been completely ameliorated.

 

How is SPG a fair comp when they get $53 per foot in rents at their properties, versus SRG in the teens?

[pcm983]

@BTShine:

 

In my downside case, I use a 6.5% cap rate which I think is reasonable as other REIT's with similar quality real estate trade at lower cap rates. As for timeline, I don't have a specific timeline in mind, assuming it takes maybe 3-4 years to do the bulk of it.

 

@peridotcapital:

 

SPG is a fair comp in my opinion because the quality of the real estate is similar - SRG receives lower rates because it's average lease is much larger sf-wise than SPG, but if you look at the actual properties, SRG and SPG are co-located at a lot of locations - I think the risk profile is quite similar given they have effectively very similar exposures.

 

 

[Shane]

 

@peridotcapital:

 

SPG is a fair comp in my opinion because the quality of the real estate is similar - SRG receives lower rates because it's average lease is much larger sf-wise than SPG, but if you look at the actual properties, SRG and SPG are co-located at a lot of locations - I think the risk profile is quite similar given they have effectively very similar exposures.

 

How much of the portfolio is actually co-located?  I think of them as having a much different portfolio of properties with SPG being mostly A-malls and SRG having some A-malls and a lot of properties more similar to strip malls...

[GCA]

 

@peridotcapital:

 

SPG is a fair comp in my opinion because the quality of the real estate is similar - SRG receives lower rates because it's average lease is much larger sf-wise than SPG, but if you look at the actual properties, SRG and SPG are co-located at a lot of locations - I think the risk profile is quite similar given they have effectively very similar exposures.

 

How much of the portfolio is actually co-located?  I think of them as having a much different portfolio of properties with SPG being mostly A-malls and SRG having some A-malls and a lot of properties more similar to strip malls...

 

About 3MM of 34MM GLA are in malls owned by Simon.

 

50.5% of SRG's square feet are "Shopping Center/Freestanding" as opposed to "Mall" according to the CMBS... so the properties are not necessarily that similar.

[pcm983]

~10% of the appraised value in the CMBS collateral package is in malls owned by Simon, with another ~10% in malls owned by GGP / Macerich. Not to mention SRG has notable JV's with all 3 aforementioned REIT's. There is likely some additional overlap but the excel sheet I have doesn't list the mall owners for ~40% of the value in the collateral package.

 

Also, from a very well done VIC write-up on SRG in February 2016:

 

"Retail real estate investors should be very familiar with the quality of SRG’s portfolio based on their investments in other publicly traded REITs, as 43% of SRG’s leasable square footage is in centers owned by publicly traded REITs.  SRG’s overlap tends to reside much more in high quality REIT portfolios than in those that own B Malls.  To demonstrate this point, we have done an implied cap rate analysis of the publicly traded malls in which SRG’s properties reside weighted by the number of properties that overlap.  Based on this analysis, SRG’s properties reside in REITs that trade at a weighted average cap rate of 5.7%, further demonstrating the quality of the portfolio."

[pcm983]

the whole point is they are redeveloping the legacy Sears RE into higher quality RE. Also, I think the point of the footprint overlap is that you are exposed to the same idiosyncratic risks - i.e., if you are in the same mall, you are exposed to the same footraffic trends, weather patterns, demographic trends, etc. the psf rent is not as relevant because 1) srg is in the process of re-leasing its RE at 3-5x higher rents, and 2) you need to adjust for the size discount you get when signing large leases vs. smaller leases

[koshigoe]

 

 

How is SPG a fair comp when they get $53 per foot in rents at their properties, versus SRG in the teens?

 

 

All mall REITs cheat (industry practice) and don't include dept stores in their per foot rent averages. A holdover from the olden days and probably misleading at best, in the new de-malling, mixed use paradigm. For example, Macerich only reports per square foot for stores under 10k sq ft.

 

SRG has huge first mover advantage that I believe will become more apparent in years ahead, as they have blank canvas, but Simon, GGP, and private mall operators (ie: the competition) have to get rid of legacy leases and the small inline (often enclosed) situation first, before they even get to SRG starting point.

 

Plus, look at the average age and makeup of SRG management, I think it's a plus when compared to the stodgier company peers.

 

 

[koshigoe]

Sears posted new closures on their website, didn't see any news articles on it though.

 

Lots of SRG properties, see attached.

https://searsholdings.com/docs/082118-store_closing_list.pdf

 

Did anyone read that Lowe's is closing Orchard Supply? SRG had a new one going in FL at Fashion Square, and was almost complete.

 

[LongTermView]

Did anyone read that Lowe's is closing Orchard Supply? SRG had a new one going in FL at Fashion Square, and was almost complete.

 

Yeah, Orchard Supply was in the news on tv tonight.

[longtermdave]

Some color on the two companies. Not much here that isn't already known to the board...

 

As Sears Withers, Its Former Stores Fuel a New Fortune

 

https://www.nytimes.com/2018/08/28/business/sears-seritage-edward-lampert.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank&module=package&version=highlights&contentPlacement=5&pgtype=sectionfront

[koshigoe]

maybe you guys have already seen, on the 20 some SRG seals stores that recently closed, the 8-k said only 12 were sears leaving, so SRG is really ramping up the recalls with about 10 more.

 

I believe 2019 should be SRG's Annus mirabilis, with several large redevs starting with redmond (approved), dallas and hicksville, almost all of the redevelopment properties coming online by end of the year, and the new financing allowing for an increase in redevelopment pace.

 

and with still some 10 million shares short on a footing that crumbles more by the day

[LongTermView]

Some color on the two companies. Not much here that isn't already known to the board...

 

As Sears Withers, Its Former Stores Fuel a New Fortune

 

https://www.nytimes.com/2018/08/28/business/sears-seritage-edward-lampert.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank&module=package&version=highlights&contentPlacement=5&pgtype=sectionfront

 

I like this part:


Built just after World War II, the Art Deco-style Sears building in Santa Monica is across from a train station. Renderings of the new office space show young people working on a roof deck overlooking the Pacific.

 

“It is going to be worth an enormous amount of money,” said Bob Safai, founding partner of Madison Partners, a commercial real estate firm in the Los Angeles area.

 

In New York State, Seritage acquired property in relatively higher income areas.

 

The median income in the 12 ZIP codes in New York where Seritage bought stores is $74,266, according to an analysis by The New York Times. The median income in the ZIP codes that include the 46 Sears and Kmart stores in New York that Seritage did not acquire and are still operating is $67,962.

[AJB96]

The Redmond city council approved Seritage's development project.

 

This will be Seritage's first residential mix use development.

 

https://www.redmond-reporter.com/news/redmond-council-approves-overlakes-seritage-development/

[LongTermView]

The Redmond city council approved Seritage's development project.

 

This will be Seritage's first residential mix use development.

 

https://www.redmond-reporter.com/news/redmond-council-approves-overlakes-seritage-development/

 

This sounds like a big deal:

Seritage Growth Properties submitted a project application to the city in 2015 for the mixed-used development, which will include 100,000 square feet of street-level retail space, 266,800 square feet of office space and nearly 62,000 square feet of restaurant space.

 

Included in this would be 500 apartments, a 210-room hotel, around two acres of parks and open space and 2,245 underground parking stalls for a total of 1.05 million square feet of new development in Redmond’s Overlake neighborhood.

 

Does anyone have a link/source for the project application?

 

Is this the sf breakdown?

100,000 retail

266,800 office

  62,000 restaurant

621,000 apartments and hotel?

 

How much will this cost?

[LongTermView]

Found some answers. http://www.redmond.gov/cms/One.aspx?portalId=169&pageId=224202 has a list of documents.

 

The Development Agreement at http://www.redmond.gov/common/pages/UserFile.aspx?fileId=234614 says the following:

500 multifamily residential units (equivalent to approximately 476,865 square feet), a 210-room hotel (equivalent to approximately 121,565 square feet)