SRG - Seritage Growth Properties

[WneverLOSE]

Going down 60% on no news and 8 times the normal volume...

I'm done with investing, this game is totally rigged, someone knows something and we are left here holding the bag, I really hope the SEC investigates this but the damage is done and I'm broke...

[willie2013]

Redemptions and forced selling ?

[RadMan24]

We'll see, dilution is almost a certainty to keep this thing alive.

[tede02]

In the most recent report, SRG had something like $130m in cash on balance sheet and contracts to sell another roughly $150 million in property. Berkshire holds all the debt and Buffett personally owns the stock. Seems like they would renegotiate the debt in an extreme situation like this.

[johnny]

The fact that Berkshire owns the DEBT and WB owns the equity should make you more concerned.

 

He would never have Berkshire do a deal that could be characterized as bailing out his own equity position, especially given his pass-through ownership of the equity would probably increase if Berkshire pushed as hard as it could.

[RadMan24]

The fact that Berkshire owns the DEBT and WB owns the equity should make you more concerned.

 

He would never have Berkshire do a deal that could be characterized as bailing out his own equity position, especially given his pass-through ownership of the equity would probably increase if Berkshire pushed as hard as it could.

 

Berkshire has $1.6 billion lent to SRG. SRG could renegotiate the terms of that debt, mortgage more properties, etc to raise liquidity. SRG could also do an equity or preferred offering with another party to raise funds for more redevelopment opportunities should the virus soak up funds.

 

I don't think the Buffett/Berkshire cross ownership is a negative.

 

As of now, rent payments are being made, and interest payments can be made. If you see mass bankruptcies in SRG's portfolio and lease drops, then things could get ugly. The stock is giving pretty good betting odds today though. 

[johnny]

I mean....I understand that a firm can renegotiate its debt with its lenders. I'm saying: why would Berkshire not extract a pound of flesh in this deal? Not only for the normal capitalist reasons, but because in the absence of an apparently Berkshire-weighted exchange, there will be this reputation-diminishing narrative that maybe Berkshire goes soft on firms that happen to be owned individually by Warren.

 

Why shouldn't the resolution be the outright acquisition of SRG at a 20% premium to current prices? Any other buyers putting in offers right now?

 

It makes a lot of sense as Berkshire sub--OK rates of return, maybe some synergies if See's Candy wants to try a 40,000 square foot concept.

 

I'm not trying to comment on the probability of real distress for the firm, I'm just not sure I'd derive so much confidence from the WB/BH link as a backstop that will be pleasing to shareholders who were in at $40.

[Foreign Tuffett]

Not surprising that SRG has been taken out to the woodshed in this environment. As Ballinvarosig Investors and I both mentioned late last month, SRG has limited liquidity relative to its large capital spending needs.

 

The crisis means that selling properties off to raise cash is, at least in the short term, going to be significantly more difficult.

 

Last but not least, keep in mind that over 50% of their total square footage is vacant.

 

I think there is a very real chance that we see serious distress here. Or, like johnny wrote, an opportunistic buyer can step in and try to get the company at a discount.

[TwoCitiesCapital]

The financial positioning was precarious before the this virus mess. Now it's worse so. Very likely some construction is delayed. Very likely some tenants are trying to renegotiate rents or contractual start dates. Very likely some property sales that would've been made won't get closed. 

 

2020 was supposed to be the year Seritage turned the corner. Realistically they'll need to find a way to survive to 2021 and the thesis is pushed out fairly dramatically with significantly increased chance of some major dilution. Also quite likely leases signed this year are at significantly more favorable rates given the desperate need for cash.

 

If you think all this is nuts, just look at mortgage REITs that have been slaughtered while owning govt guaranteed bonds....

 

Might be worth taking a flyer on an OOO options at this point, but probably not buying the stock.

[bizaro86]

Transformco is taking in $1 B from Costco.

 

That might put ESL/transformco as another potential bidder for any recap transaction.

[ratiman]

In addition to the problems already mentioned, it might be the quality of the tenants. From Barrons:

 

 

"In addition to the 6% of its rent roll still paid by Sears and Kmart at year end, Seritage’s top tenants included the arcade chain Dave & Buster’s Entertainment (PLAY), the At Home Group (HOME) furnishings chain, and the clothing discounter Burlington Stores (BURL)—totaling 18% of the REIT’s annual rent and all causing angst in their own investors lately, amid faltering revenue."

 

 

[WneverLOSE]

Total capitalization went from 4.1B$ to 2.1B$ (Debt + Pref + Equity)

The idea I had was they will be able to earn ±600m of rental income after developing their current "assets", the big two questions for me was how much debt will they need to get there and how long will it take and I thought that if they sell the small market properties and used all income for redevelopment they wouldn't really need much more debt to be done in 10 years (in 2 years they were expecting 200m of rental income before expenses and interest so about 0 of real usable income but many project are underway and should have added stright to the bottom line since all costs are already accounted for in the 180m or so of costs + an expectation of lower borrowing costs as things progress from 7% to something close to 4.5%)

I thought this could be a 10B market cap company in 10 years (Assuming low interest rates stay and cap rates don't rise I thought a real estate company with 600m rental income and around 2B of debt should be valued by a discount rate of 7%) with no distributable income for those 10 years this makes the PV of the 10B in 10 years at 2.5B (Assuming a 15% Required rate of return for the 10 years the investor doesn't get distributions and for the added risk of higher leverage relative to income and execution risk) for a share price value of around 45$ (With an average cost for me of 38$).

 

 

I guess SRG is more exposed to a recession/depression since REITs with 99% occupancy will still have some income in 3 or 5 years but SRG could be at 0% if no one rents new locations (costs are the same as signed contract at the moment) and lack of access to capital turns this into a binary outcome, stay alive and thrive or go bankrupt.

In my opinion around 4-5 years of lost rentals is priced in OR bankruptcy due to lack of capital access OR something in between, 1-2 years of lost income and some higher change of bankruptcy.

 

After I made you read all of this I'm sorry to tell you I have no advice, I clearly didn't think enough about what adverse circumstances will bring to SRG (probably because I said "Worst case Buffett will buy them and I will get BRK.B shares instead") and how it will affect equity value, I don't think I will sell until it will be much more clear what will happen in the long term (How much lower can it go ?  :P)

 

Learn from my mistake, size appropriately.

 

P.S - I didn't learn from my mistake and I have around 50% of my net worth in one company, but this time it's different  ::)

 

[maxthetrade]

"P.S - I didn't learn from my mistake and I have around 50% of my net worth in one company, but this time it's different  ::)"

 

Well there was a time when I had 150% of my net worth in one company. Of course I was young and bold and it worked out fine for me but you'll learn from your mistakes  ;)

[scorpioncapital]

I remember when Buffett said at annual meeting that seritage would do fine but Berkshire would do better. What an understatement! Even he didn't know I guess. I just find the whole Buffett seritage connection quite odd. Maybe a mistake or maybe a massive but temporary drawdown. But even he must admit a drawdown of 70 percent does look more of a mistake on entry price than anything else

[nodnub]

Can someone explain to me why I lost 90% of my money ?

 

We sometimesLOSE?    :'(

[WneverLOSE]

Can someone explain to me why I lost 90% of my money ?

 

We sometimesLOSE?    :'(

 

Admins, Change my name !  8)

 

But on a serious note, REIT's have become SERIOUSLY cheap, so cheap that I never thought I would see such prices (except from a world where we have hyperinflation and 15% Interest rates), prices have doubled within a DAY for the 2 REITs I was planning to buy, I really hope that they will go there again in the next few days so I can buy in prices I am confident will produce 18+% long term returns with only 30-40% leverage of asset value.

[Sunrider]

Which ones? I've eyed MAC, SPG - the former for its higher quality assets, the latter for its higher quality management. However, I've not done in-depth work on either.

Thanks.

[Gregmal]

$7. Insane.

[rb]

$7. Insane.

Buffett's gonna buy the whole thing..... from his PA.

[peridotcapital]

From $37 to $7 since mid February. $1.7B of lost equity value for a company that will only burn $20M per month even if none of their tenants pay a dime of rent.

 

What if BRK releases the next $400M on the credit facility with some heavy conditions to pad their liquidity, or they sell a good property or two? This is a steal unless this recession lasts a year or two and unemployment stays in the double digits for more than just a few months. On an EV/sf basis it is much cheaper than when Eddie kicked it out of SHLD and they had hardly any other tenants.

 

I didn't get the long thesis at $37, but at $7 this thing looks like one of the best risk/rewards in the real estate universe (and there are a lot of goodies to pick from). And the prefs are 50 cents on the dollar for folks who want income.

 

 

[CorpRaider]

Interesting.  I think this is going to linger until a vaccine is available and widely administered.  That's...18 months?  Equity is not a zero in that circumstance? 

[coc]

Interesting.  I think this is going to linger until a vaccine is available and widely administered.  That's...18 months?  Equity is not a zero in that circumstance?

 

You think people are going to stop going out for a year and a half?

[undervalued]

Interesting.  I think this is going to linger until a vaccine is available and widely administered.  That's...18 months?  Equity is not a zero in that circumstance?

 

You think people are going to stop going out for a year and a half?

 

People who wants to avoid getting COVID, yes.

[Gregmal]

On the basis of reasonableness, who in their right mind is touching this when you have SPG and HHC where they currently are?

 

There's some nice stuff here, but there is plenty in a lot of other places too. Further, I've seen enough from this that has always lead me to believe the much of the SHLD value got sold off prior to the spin. How does one look at a property like this and do anything but cringe?

 

https://www.loopnet.com/property/380-Blanding-Boulevard-Orange-Park-FL-32073/12019-12042502029700101/

 

$6,615,000

 

380-386 Blanding Blvd., Orange Park

 

Type: Old Time Pottery and Freddy’s Frozen Custard & Steakburgers

 

Parcel size: 9.37 acres

 

Building size: Two buildings totaling 87,380 square feet

 

Buyer: Pine20 Blanding LLC

 

Seller: Seritage SRC Finance LLC

 

 

[Spekulatius]

Interesting.  I think this is going to linger until a vaccine is available and widely administered.  That's...18 months?  Equity is not a zero in that circumstance?

 

You think people are going to stop going out for a year and a half?

 

People who wants to avoid getting COVID, yes.

 

I absolutely feel like any recovery will be very muted, especially with travel and entertainment and any activity regarding larger groups until a vaccine is available. Given the timelines for a vaccine (at best 12 month from now), I think a lot of hotel business, Restaurants and most airlines are going to be zeros.