SRG - Seritage Growth Properties

[Candyman1]

You said SRG got the best stores/locations, well wouldn't one expect then rents to be higher than even the ones advertized by 50% of SPG numbers?

 

no!

 

the thesis, through a margin of safety lens, is that SRG can undercut these inflated rent levels, release space at 17 (or 25$ a square foot if you look to projected stabilized numbers) and still make 4-5x off their rents at acquisition.

 

this is the worst case.

 

the best case is that their properties are in fact as good as Simon and Macerich on the whole, and will command quite high rents, like those already seen at San Diego, and soon to be seen at Aventura, Hicksville, Valley View and others.

 

but a lot of SRG value will be proven through JVs with residential sales, as seen already at Redmond and Hicksville.  SRG is a different beast than Simon or Macerich or GGP.  I mean, GGP was sold to BPY because they realized they were screwed and couldn't change to mixed use in a public environment.

 

the situation is more nuanced than just picking headline rent numbers and saying x >y.

 

One clue ... $1,200,000,000

[Shane]

You said SRG got the best stores/locations, well wouldn't one expect then rents to be higher than even the ones advertized by 50% of SPG numbers?

 

no!

 

the thesis, through a margin of safety lens, is that SRG can undercut these inflated rent levels, release space at 17 (or 25$ a square foot if you look to projected stabilized numbers) and still make 4-5x off their rents at acquisition.

 

this is the worst case.

 

the best case is that their properties are in fact as good as Simon and Macerich on the whole, and will command quite high rents, like those already seen at San Diego, and soon to be seen at Aventura, Hicksville, Valley View and others.

 

but a lot of SRG value will be proven through JVs with residential sales, as seen already at Redmond and Hicksville.  SRG is a different beast than Simon or Macerich or GGP.  I mean, GGP was sold to BPY because they realized they were screwed and couldn't change to mixed use in a public environment.

 

the situation is more nuanced than just picking headline rent numbers and saying x >y.

 

One clue ... $1,200,000,000

 

COBF can be a great place for a thoughtful discussion, but it doesn't seem like that is what you are seeking here.

[peridotcapital]

"In malls where leases were signed decades ago, Sears rents could be as low as $4 a square foot. New tenants in the same space could bring as much as six times that amount."

 

https://www.wsj.com/articles/sears-exit-would-leave-big-holes-in-malls-some-landlords-welcome-that-1539342000

 

I don't think we see this situation again. There's not another Sears going under with these kind of goofy low rents. And SRG owns the best and the most.

 

JC Penney is next. Their debt load + free cash flow breakeven during a banner retail year like 2018 does not bode well for the future. They can last a few years maybe, but that's it.

[SlowAppreciation]

http://ir.seritage.com/file/Index?KeyFile=395346869

[DRValue]

I expect the Dividend to be cut but like the preferred if they go lower.

[koshigoe]

 

 

JC Penney is next. Their debt load + free cash flow breakeven during a banner retail year like 2018 does not bode well for the future. They can last a few years maybe, but that's it.

 

yes, sure, though there is no SRG-like entity that will benefit en masse from JC Penny going under. The SRG / SHLD situation is a one off it seems, where SRG is the lone or at least lion share beneficiary from a retailers collapse.

 

there was a similar situation back in the 70s/80s with Vornado that Buffett was on the board of for a time. He lamented missing out on the situation as he resigned before it rocketed up over the next 20 years. It's a footnote in Snowball.

 

To your JC Penny point, Buffett has said that rather than bet on which car manufacturer will win, the right choice was to short horses. A lot of these 'old white guys' on the boards of these mall REITS have doomed their companies.

 

My other large position is *** potential trigger warning *** JD.com. BABA to me is black box that pushes into gray too much, and I see JD winning over long term. It's an interesting situation and some of the data/research from AMZN, SRG, and retailers/landlord struggles can be applied there it seems.

 

 

[Foreign Tuffett]

Lots of SRG-owned stores on this list.

 

 

https://www.businessinsider.com/sears-kmart-stores-closing-list-2018-10

[AJB96]

Ben Schall wrote a very well done letter to shareholders this morning:

 

http://ir.seritage.com/Cache/1001244146.PDF?O=PDF&T=&Y=&D=&FID=1001244146&iid=4584761

[Shane]

Stock up +5.7%, I'm a little surprised.  Had hoped for lower prices to top up.

[cubsfan]

Ben Schall wrote a very well done letter to shareholders this morning:

 

http://ir.seritage.com/Cache/1001244146.PDF?O=PDF&T=&Y=&D=&FID=1001244146&iid=4584761

 

Thanks for posting Alex - great communication by Ben Schall.

Boy, oh boy, if you parse his letter carefully and believe it - this is going to be a great investment.

I wouldn't want to be part of the 10M shares that are short.

[LongTermView]

Ben Schall wrote a very well done letter to shareholders this morning:

 

http://ir.seritage.com/Cache/1001244146.PDF?O=PDF&T=&Y=&D=&FID=1001244146&iid=4584761

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

[Candyman1]

Ben Schall wrote a very well done letter to shareholders this morning:

 

http://ir.seritage.com/Cache/1001244146.PDF?O=PDF&T=&Y=&D=&FID=1001244146&iid=4584761

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

 

Hmmm interesting ... so since the last SRG presentation (Sept 2018) the average rent has gone down from $17.5 per sq foot to $16.5 per sq foot. Maybe a typo ...

 

Lets see how that $3.4 billion squares up to the rent. If I go with the last Q number, I get 7.8 million sq feet completed or under development. Lets assume there are no cost to running the SRG real estate and the rent stays $17.5 per sq foot. Also lets assume that the cap rate is 5%. So 7.8 million sq feet times (17.5/0.05) gets me $2.73 billion. That is for 78 projects, not the 79 listed by BS in his letter. I guess that last project is worth 670 million.

[peridotcapital]

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

 

The current E/V at $42 is $3.3B. Using the numbers above, after they spend (borrow) another $900M (taking the E/V to $4.2B), the leading 102 assets would be worth $3.8B. Sure, the undiscounted net value of everything is more than $42/share, but Schall's figures don't make me want to buy at that price. Not to mention, who knows what cap rate he is using despite rising rates.

 

[koshigoe]

 

The current E/V at $42 is $3.3B. Using the numbers above, after they spend (borrow) another $900M (taking the E/V to $4.2B), the leading 102 assets would be worth $3.8B. Sure, the undiscounted net value of everything is more than $42/share, but Schall's figures don't make me want to buy at that price. Not to mention, who knows what cap rate he is using despite rising rates.

 

EV more like 4.1 B now.

 

I offer different conclusion, that is way cheap. They're basically fairly valued now, maybe a bit expensive for current income once lease-up and dev are finished depending on cap rate you select (Schall et al estimate based on mid-to-high 5s, see response to candyman below).

 

But then that leaves 25-30 million sq ft to get 3x-4x re-rate. Even if commercial real estate goes haywire, they can sell off 5 mil of garbage properties (prob current plan anyway) for more than they paid (see past sales this year for podunk Kmarts) and lease the remaining 25m at min 3x rents. (current avg is 4.xx a sq ft...come on)

 

I struggle to see worse outcome than that. And that outcome will produce something like 15% per annum for a decade for long term holder, and a triple from current stock price on something like 600 mil net income (give or take a hundred million, no need to be precise).

 

 

 

 

[koshigoe]

Hmmm interesting ... so since the last SRG presentation (Sept 2018) the average rent has gone down from $17.5 per sq foot to $16.5 per sq foot. Maybe a typo ...

 

Lets see how that $3.4 billion squares up to the rent. If I go with the last Q number, I get 7.8 million sq feet completed or under development. Lets assume there are no cost to running the SRG real estate and the rent stays $17.5 per sq foot. Also lets assume that the cap rate is 5%. So 7.8 million sq feet times (17.5/0.05) gets me $2.73 billion. That is for 78 projects, not the 79 listed by BS in his letter. I guess that last project is worth 670 million.

 

I hope you don't get banned any time soon for being a (0/10) troll, refuting your statements has helped me organize my own thoughts.

 

values are based on "...and the projects have been stabilized" rents that are estimated at avg $23 a foot for first 73 projects (per the latest supplement pg 14)

 

The latest presentation says those 73 projects should be worth 3.170B, so we can figure the assumed cap rate.

 

23* 7.915mil = 182 mil / .057 = something like 3.190B

 

so Schall assumes something like 5.7 cap rate.

 

add in the 6 new projects and the JV cut, and you've got near the 3.8 as stated.

 

 

 

[beaufort]

42 SRG stores are part of the 142 stores that SHLD will shut down in bankruptcy.  There were 102 stores left with a SHLD presence for end of Sept 2018.  The happy result is 60 stores out of the SRG portfolio will remain with a SHLD tenant. 

[TwoCitiesCapital]

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

 

The current E/V at $42 is $3.3B. Using the numbers above, after they spend (borrow) another $900M (taking the E/V to $4.2B), the leading 102 assets would be worth $3.8B. Sure, the undiscounted net value of everything is more than $42/share, but Schall's figures don't make me want to buy at that price. Not to mention, who knows what cap rate he is using despite rising rates.

 

Correct me if I'm wrong, but the $3.8B was only for projects currently under development which wouldn't include current property that isn't under development and the Sears stores that are part of the bankruptcy.

 

So, total EV of $4.1B for a portfolio value of $3.8B plus whatever value you place on the undeveloped properties they get. I haven't run the numbers myself (maybe someone with more at stake could opine on wish that "plus" figure is), but seems like the current developments come close to putting a a floor on your downside and any new projects add to the upside scenarios.

[peridotcapital]

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

 

 

 

The current E/V at $42 is $3.3B. Using the numbers above, after they spend (borrow) another $900M (taking the E/V to $4.2B), the leading 102 assets would be worth $3.8B. Sure, the undiscounted net value of everything is more than $42/share, but Schall's figures don't make me want to buy at that price. Not to mention, who knows what cap rate he is using despite rising rates.

 

Correct me if I'm wrong, but the $3.8B was only for projects currently under development which wouldn't include current property that isn't under development and the Sears stores that are part of the bankruptcy.

 

So, total EV of $4.1B for a portfolio value of $3.8B plus whatever value you place on the undeveloped properties they get. I haven't run the numbers myself (maybe someone with more at stake could opine on wish that "plus" figure is), but seems like the current developments come close to putting a a floor on your downside and any new projects add to the upside scenarios.

 

Agree about the floor. I just struggle to see enough upside over the next, say, 3 years, to warrant getting excited at current prices. Do I think the stock slowly trends higher over the long term? Sure. Do I think it does a 15% CAGR over the next decade? Not at all. And I don't buy a normalized cap rate in the 5's either.

[Shane]

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

 

 

 

The current E/V at $42 is $3.3B. Using the numbers above, after they spend (borrow) another $900M (taking the E/V to $4.2B), the leading 102 assets would be worth $3.8B. Sure, the undiscounted net value of everything is more than $42/share, but Schall's figures don't make me want to buy at that price. Not to mention, who knows what cap rate he is using despite rising rates.

 

Correct me if I'm wrong, but the $3.8B was only for projects currently under development which wouldn't include current property that isn't under development and the Sears stores that are part of the bankruptcy.

 

So, total EV of $4.1B for a portfolio value of $3.8B plus whatever value you place on the undeveloped properties they get. I haven't run the numbers myself (maybe someone with more at stake could opine on wish that "plus" figure is), but seems like the current developments come close to putting a a floor on your downside and any new projects add to the upside scenarios.

 

Agree about the floor. I just struggle to see enough upside over the next, say, 3 years, to warrant getting excited at current prices. Do I think the stock slowly trends higher over the long term? Sure. Do I think it does a 15% CAGR over the next decade? Not at all. And I don't buy a normalized cap rate in the 5's either.

 

Do you question the 15% CAGR primarily because of the cap rate or are there other reasons?  Would be helpful for me (and other longs) to understand your reasoning.

[peridotcapital]

 

 

Do you question the 15% CAGR primarily because of the cap rate or are there other reasons?  Would be helpful for me (and other longs) to understand your reasoning.

 

Hard to comment on that. For a base case 15% CAGR scenario I don't know what the underlying assumptions are.

 

Actually, I see that he said $600M net income in a decade. I would take the under on that as well.

 

[GCA]

 

I like this part:

We estimate that the 79 projects that we’ve completed or commenced solely on the Seritage platform will be worth upwards of $3.4 billion ($3.1 billion at share) once the remaining $940 million ($880 million at share) of investment capital has been deployed and the projects have been stabilized. We have 23 assets in joint ventures with the three largest mall owners with a basis of $370 million at our share. Just with those 102 assets, our portfolio would be worth almost $3.8 billion. The remainder of the portfolio provides meaningful value creation opportunity, including some of our top locations and at least three dozen sites with potential for significant densification.

 

 

 

The current E/V at $42 is $3.3B. Using the numbers above, after they spend (borrow) another $900M (taking the E/V to $4.2B), the leading 102 assets would be worth $3.8B. Sure, the undiscounted net value of everything is more than $42/share, but Schall's figures don't make me want to buy at that price. Not to mention, who knows what cap rate he is using despite rising rates.

 

Correct me if I'm wrong, but the $3.8B was only for projects currently under development which wouldn't include current property that isn't under development and the Sears stores that are part of the bankruptcy.

 

So, total EV of $4.1B for a portfolio value of $3.8B plus whatever value you place on the undeveloped properties they get. I haven't run the numbers myself (maybe someone with more at stake could opine on wish that "plus" figure is), but seems like the current developments come close to putting a a floor on your downside and any new projects add to the upside scenarios.

 

Agree about the floor. I just struggle to see enough upside over the next, say, 3 years, to warrant getting excited at current prices. Do I think the stock slowly trends higher over the long term? Sure. Do I think it does a 15% CAGR over the next decade? Not at all. And I don't buy a normalized cap rate in the 5's either.

 

It's fairly easy to put together an estimate of EV based on what Schall gave us in his letter (recent 8K). 

+$3.1B at share for the project under development (so this includes the one off JVs like Santa Monica and La Jolla)

- 880MM in money they need to spend to complete these projects

+370MM for their share of the mall JVs

= $2.29 B

Then

+ 1.0 B for all the properties remaining (those without projects that haven't been sold).  This is the sum off the lowest appraisal for each of these properties.

= $3.3 B EV

or ~$40 a share

 

So where is the upside?

1)  Their 3 mega projects (Valley View, Redmond, and to a lesser extent, Hicksville) will provide a lot of upside.  In the above analysis they're valued at the ridiculous low appraisal values, about $66MM total.  Construction costs on Valley View alone are going to be ~$800MM.

2)  Redevelopment of the properties that don't have a project yet.  Again I've valued these at appraisal in the above.

3)  FURTHER redevelopment of the properties that are already included in the top $3.1B number.  Many of these projects only took back half of the Sears space.  That means there is another half to take back and redevelop.  The $3.1B number does not include this potential number.

4)  Densification of projects in the $3.1B number.  I put this in a separate category from 3) above.  3 should be (relatively) easy... you kick out the SHLD, put a new sign on, and find an elusive big box tenant.  In this category I'm talking about doing something like Putting another building in the parking lot of the Santa Monica redevelopment project.

[koshigoe]

Came across this article today, probably one of the worst researched articles I have read recently, surprised to see the low quality trash that Bloomberg puts out.

 

No mention of ROIC of new projects, releasing spreads, current avg rent on 30m+ sq ft of owned space.

 

So I check his twitter, and a colleague of his congrats him for this 'deep dive'. Keep your head people, this is why you can make money in the stock market LOL

 

https://www.bloomberg.com/opinion/articles/2018-10-30/sears-turns-into-wrong-kind-of-anchor-for-seritage-reit

[TwoCitiesCapital]

Came across this article today, probably one of the worst researched articles I have read recently, surprised to see the low quality trash that Bloomberg puts out.

 

No mention of ROIC of new projects, releasing spreads, current avg rent on 30m+ sq ft of owned space.

 

So I check his twitter, and a colleague of his congrats him for this 'deep dive'. Keep your head people, this is why you can make money in the stock market LOL

 

https://www.bloomberg.com/opinion/articles/2018-10-30/sears-turns-into-wrong-kind-of-anchor-for-seritage-reit

 

Lol! I repurchased half of what I had mentioned I sold today at $38.15. If it goes lower, I'll buy the other half, and will want to add significantly if we get to the low $30s.

 

 

This has only be a small position (~2%) for me opened earlier this year around $40. When WB announced the $ and the stock jumped 20-25% shortly thereafter, I let go of the about 20% of the position to take all the gains off the table.

 

While the long-term development is intact, there are too many headwinds with rising rates and an expected Sears bankruptcy on the horizon to not take quick and easy gains like that.

 

Ultimately, I'd love to repurchase all of those share, and then some, but I want some of the negativity to be worked out and my guess there will be other opportunities to buy at lower prices than $50/share while that is happening. If we hit $40/share again, I expect I'll be buying back everything that was sold plus some.

[undervalued]

Came across this article today, probably one of the worst researched articles I have read recently, surprised to see the low quality trash that Bloomberg puts out.

 

No mention of ROIC of new projects, releasing spreads, current avg rent on 30m+ sq ft of owned space.

 

So I check his twitter, and a colleague of his congrats him for this 'deep dive'. Keep your head people, this is why you can make money in the stock market LOL

 

https://www.bloomberg.com/opinion/articles/2018-10-30/sears-turns-into-wrong-kind-of-anchor-for-seritage-reit

 

 

But at a stock price of just more than $38, investors are still valuing the company at nearly $1.4 billion. Its true value is most likely much lower.

 

Isn't it about 2B? That's .6B off for pretty simple calculation?

[Foreign Tuffett]

Came across this article today, probably one of the worst researched articles I have read recently, surprised to see the low quality trash that Bloomberg puts out.

 

No mention of ROIC of new projects, releasing spreads, current avg rent on 30m+ sq ft of owned space.

 

So I check his twitter, and a colleague of his congrats him for this 'deep dive'. Keep your head people, this is why you can make money in the stock market LOL

 

https://www.bloomberg.com/opinion/articles/2018-10-30/sears-turns-into-wrong-kind-of-anchor-for-seritage-reit

 

 

But at a stock price of just more than $38, investors are still valuing the company at nearly $1.4 billion. Its true value is most likely much lower.

 

Isn't it about 2B? That's .6B off for pretty simple calculation?

 

Exactly. I almost stopped reading when he got the market cap wrong by not accounting for the operating partnership units.