SRG - Seritage Growth Properties

[johnny]

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?

 

Your bull case is that in the midst of a 20% drop in GDP and the impending bankruptcies of approximately 100% of their tenants, that Berkshire is going to loan them $400m at a net interest rate of 6%?

 

I don't doubt that Berkshire is willing to deal here, but can you point to a similarly generous deal they cut in the great recession?

 

If you're expecting Berkshire money, expect it to come at over 10%, and probably with warrants. Since the projected return on cost was (in the best market ever) only about 10%, that basically means you're giving away your redevelopment value (worse, since you're paying before they're stabilized).

 

 

[scorpioncapital]

This has fallen far more than my expectations. I could say beyond my wildest dreams but not in a good way. Could it also be a high short interest attack ? True nobody saw the pandemic coming but srg was kinda financially sick even before going in. Really very simple problems like not enough money, too much debt, development without much restraint. I'm trying to see what Buffett saw in it 3 years ago to buy 8 percent of the common and lend 2 billion. It seems a relatively large commitment.

[peridotcapital]

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?

 

Your bull case is that in the midst of a 20% drop in GDP and the impending bankruptcies of approximately 100% of their tenants, that Berkshire is going to loan them $400m at a net interest rate of 6%?

 

I don't doubt that Berkshire is willing to deal here, but can you point to a similarly generous deal they cut in the great recession?

 

If you're expecting Berkshire money, expect it to come at over 10%, and probably with warrants. Since the projected return on cost was (in the best market ever) only about 10%, that basically means you're giving away your redevelopment value (worse, since you're paying before they're stabilized).

 

If cash burn is $20M per month in a worst case (no rent collected), they only need $180M to get through year-end. There are a lot of ways to get there. If the answer is a 10% or 12% loan for a limited period of time, I don't think that erodes too much value. The EV per foot on the entire portfolio is like $40 $60 (edit 4/2/20) right now... about what they have been selling empty boxes in disrepair for.

 

Now, if you think 100% of their tenants will file bk AND be liquidated and the UE rate is 10% plus for a couple of years, then that is a different story. But that is not likely the outcome someone looking at retail REITs today is assuming as a base case.

[Foreign Tuffett]

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?

 

Your bull case is that in the midst of a 20% drop in GDP and the impending bankruptcies of approximately 100% of their tenants, that Berkshire is going to loan them $400m at a net interest rate of 6%?

 

I don't doubt that Berkshire is willing to deal here, but can you point to a similarly generous deal they cut in the great recession?

 

If you're expecting Berkshire money, expect it to come at over 10%, and probably with warrants. Since the projected return on cost was (in the best market ever) only about 10%, that basically means you're giving away your redevelopment value (worse, since you're paying before they're stabilized).

 

If cash burn is $20M per month in a worst case (no rent collected), they only need $180M to get through year-end. There are a lot of ways to get there. If the answer is a 10% or 12% loan for a limited period of time, I don't think that erodes too much value. The EV per foot on the entire portfolio is like $40 right now... about what they have been selling empty boxes in disrepair for.

 

Now, if you think 100% of their tenants will file bk AND be liquidated and the UE rate is 10% plus for a couple of years, then that is a different story. But that is not likely the outcome someone looking at retail REITs today is assuming as a base case.

 

What #s are you using to calculate the enterprise value per square foot? I see a ~ $1.95 billion enterprise value and ~ 31.046 million square feet of space....more like $62 or $63 per square foot

[peridotcapital]

 

What #s are you using to calculate the enterprise value per square foot? I see a ~ $1.95 billion enterprise value and ~ 31.046 million square feet of space....more like $62 or $63 per square foot

 

Sorry, yes, its $60 not $40.

 

If memory serves that is nearly the same as the implied valuation when the SRG rights offering was completed, and is inline with SRG's divestitures since.

[CorpRaider]

Now do REG and STOR.  Pls.

[johnny]

Now, if you think 100% of their tenants will file bk AND be liquidated and the UE rate is 10% plus for a couple of years, then that is a different story. But that is not likely the outcome someone looking at retail REITs today is assuming as a base case.

 

Agreed here--I'm definitely interested at $7. It is a bit weird comparing the pricing of their biggest, presumably highest-risk tenants (PLAY) and the landlord. Too bad there's no cheap way to hedge using their counterparties.

 

That said, I still think you're being a little too optimistic about the price they're going to have to pay for capital in an environment where every single entity with a property tax payment will be knocking on the same three doors with their hat in their hands.

[TwoCitiesCapital]

Carnival just secured financing at 11% secured by their boats....secured financing @ double digits!!!!

 

I imagine similar terms would be offered to SRG if they needed it, but would certainly be onerous and I dunno if it'd be allowed by the other senior note holders in the capital structure.

[johnny]

SAY HIS NAME

 

Also, if I recall, the Berkshire note allows them to attach to the properties, which they've been doing. I recall language saying that Berkshire got mortgages on something like "the majority" of their assets in 2019.

 

[Foreign Tuffett]

SAY HIS NAME

 

Also, if I recall, the Berkshire note allows them to attach to the properties, which they've been doing. I recall language saying that Berkshire got mortgages on something like "the majority" of their assets in 2019.

 

Yep:

 

"As of December 31, 2019, we were not in compliance with certain financial metrics applicable to us under the agreements governing our term loan facility. As a result, we must receive the consent of the lender to dispose of assets via sale or joint venture and, as of December 31, 2019, the lender had provided such consent for all such transactions submitted for approval. There can be no assurance that the lender will consent to future dispositions of assets.  Additionally, the lender has the right to request mortgages against our assets pursuant to the mortgage and collateral requirement and, during the year ended December 31, 2019, the lender has requested mortgages on a majority of our portfolio."

Berkshire is solidly in the driver's seat here. Buffett is conflicted and, as you pointed out earlier in this thread, he very well may decide having an completely untarnished legacy is more important than risking even a small public relations snafu so close to the end of his career.

 

Also, in case anyone has forgotten, Sharon Osberg is Buffett's de facto board rep

[ukvalueinvestment]

So what does that mean - that Berkshire got security on individual assets rather than the loan being at a corporate entity level?

[johnny]

I don't recall getting the sense it was either-or. I imagine they are securing at the asset level but fully preserving recourse to parent, which is why the obligation is still presented in the 10-K as a $1.6b loan. It's almost like the counterparty might have some amount of financial sophistication.

[johnny]

The more I think about it, the more awkward it is for Berkshire.

 

Conflicts and optics aside, what's the total size of the opportunity here? Maybe $4B worth of redevelopment on the portfolio? At a 10% stabilized yield? For Berkshire's size, that's not really moving the needle, especially since there's probably $100B of 10% prefs Warren could dream up from the hot tub before the end of the day.

 

Maybe with BofBerkshire, they could start acquiring and redevving similarly bombed out retails? There's obviously tens of billions of "Seritage-like" opportunities out there, but is there much moat potential here? These things don't seem to have much secret sauce. Maybe I'm missing it.

 

So maybe this makes me slightly more bullish on the stock. While it's not likely that Berkshire will bail them out overly generously, perhaps its similarly unlikely that Berkshire drives a stake through their heart when, like I said, they could probably capture almost all of the upside with a pref deal.

 

Seems to me the current EV (~2B) puts it at low $60s/square foot, and if you assume the 1B they've already spent on projects isn't money wasted, you are maybe getting a pre-redevelopment valuation in the $30s/ft*? It's definitely interesting, but I can't see making this a real position until there's some evidence that they can access cash.

 

 

*yeah, it's not all rehab, some of its purely added sqft, and i think that $1B figure is counting some projects they've ended up monetizing, etc.

[whiterose]

Could it be a play for BPY/BAM?

Considering the size, portfolio and their liquidity..

[scorpioncapital]

Are you aware of any case where Eddie Lampert relinquished control to someone else either a sale or change of control?

[Liberty]

This thing is bonkers today. Was up 63% last I checked.

[glorysk87]

This thing is bonkers today. Was up 63% last I checked.

 

Yea...the fed backstopping pretty much any and all credit is pretty good for companies who need access to funding in order to survive

[scorpioncapital]

It's a fine line between being reckless and a black swan virus, apparently that's the view of government bailouts. I can't really tell anymore if a company is reckless or unlucky or both.

[peridotcapital]

Schall's letter today underscores that this company is far from being in dire financial straits. After today's spike to $15+ I felt like I had no choice but to sell a portion of the stock I had just picked up for $7 but it still looks cheap and I hope I can rebuy those shares back in the single digits.

[CorpRaider]

Are you aware of any case where Eddie Lampert relinquished control to someone else either a sale or change of control?

 

I think he has had his lenders take the wheel in several instances.

[merkhet]

Are you aware of any case where Eddie Lampert relinquished control to someone else either a sale or change of control?

 

I think he has had his lenders take the wheel in several instances.

 

[stockkevin]

Why are the re-lease rates so low? Maybe their properties are not in good locations or there is too much supply? Low teens versus $50/sqf at SPG.

 

They are in breach of their covenant and will have to keep selling properties to raise cash to redevelop or take on more debt at high interest rates.

[glorysk87]

Why are the re-lease rates so low? Maybe their properties are not in good locations or there is too much supply? Low teens versus $50/sqf at SPG.

 

They are in breach of their covenant and will have to keep selling properties to raise cash to redevelop or take on more debt at high interest rates.

 

You're comparing two entirely different property types.

[peridotcapital]

Why are the re-lease rates so low? Maybe their properties are not in good locations or there is too much supply? Low teens versus $50/sqf at SPG.

 

They are in breach of their covenant and will have to keep selling properties to raise cash to redevelop or take on more debt at high interest rates.

 

Much larger spaces, hence lower per sf rates. SRG has a lot of movie theaters, Dave and Buster's type chains, gyms, and bigger box stores (TJX type stuff). A lot less sub-5,000 sf boxes like Simon has.

[WneverLOSE]

Don't forget SPG is lying about their SQFT by not including common areas in the malls as if they are not theirs (and by so inflating rent per sqft)

they also have much more expenses such as advertising the malls, electricity, water and taxes on their common areas, shows and attractions in the malls that SRG doesn't have (at least not until they will redevelop the mix used assets to include common areas with fountains, entertainment and stuff).

 

Saying that, SRG is probably bankrupt if Warren feels like taking advantage of them and not lending any more money, not allowing them to sell property and continue to hold mortgage on the assets (thus not allowing secured financing from other capital providers), will be interesting (and possibly very costly for me) to see how this situation unfolds.