SRG - Seritage Growth Properties

[Saluki]

Whew!  okay dividend is still there.  I stopped buying since it's going up and I don't want to chase it.  I have some resting limit orders at 13 but they haven't been filled in the past couple of days.  If the dividend gets cancelled it might drop again (feels like the cut is priced in though) and I might add some more if I have money laying around.  From what I recall reading the S1 a few years ago, if they cancel the dividend on the preferred, then they can't pay a dividend on the common until the preferred is current and all back dividends are paid. The preferreds get a board seat too, if the dividend is cancelled, if I recall correctly. 

 

The berkshire credit line is contingent on leasing a certain amount of space to non-sears entities, which is going to be more difficult now than before because of the pandemic, but they've done a good job of selling off non-core assets to raise money and redeveloping/releasing the better sears properties.

 

My question on these is can SRG buy them back on the open market instead of calling them for redemption?  They aren't callable until the end of 2022 (at 25 par plus accrued dividends), so if it were allowed, why not buy them back at $0.60 on the dollar with the borrowed berkshire money when it becomes available?

[shamelesscloner]

What do folks think of this play on SRG...

 

<<Sears Holdings Bankruptcy estate and the Unsecured Creditors Committee filed suit against Seritage Growth Properties and Lands End seeking an order of the court which would bring SRG and LE back to SHLDQ, which has $6B in NOL’s and tax credits (and no businesses to use them)

 

I have studied and wrote on SRG and SHLDQ for 4 years and it’s clear from the legal pleadings that SRG and LE will be coming back to SHLDQ, so the best and cheapest way to buy SRG is to buy Sears Unsecured debt for pennies on the dollar and SHLDQ common stock at under .20 a share the return will be 50X or more.

 

The case is Sears Holdings v ESL and SRG/LE Case Number 18-23538>>

[Sunrider]

What do folks think of this play on SRG...

 

<<Sears Holdings Bankruptcy estate and the Unsecured Creditors Committee filed suit against Seritage Growth Properties and Lands End seeking an order of the court which would bring SRG and LE back to SHLDQ, which has $6B in NOL’s and tax credits (and no businesses to use them)

 

I have studied and wrote on SRG and SHLDQ for 4 years and it’s clear from the legal pleadings that SRG and LE will be coming back to SHLDQ, so the best and cheapest way to buy SRG is to buy Sears Unsecured debt for pennies on the dollar and SHLDQ common stock at under .20 a share the return will be 50X or more.

 

The case is Sears Holdings v ESL and SRG/LE Case Number 18-23538>>

 

Well, ... if I remember extended discussions in the SHLD threat, then other members were of the view that the fraudulent conveyance arguments won't hold water, so SRG won't be going to SHLDQ ... but what do I know :_)

[bizaro86]

What do folks think of this play on SRG...

 

<<Sears Holdings Bankruptcy estate and the Unsecured Creditors Committee filed suit against Seritage Growth Properties and Lands End seeking an order of the court which would bring SRG and LE back to SHLDQ, which has $6B in NOL’s and tax credits (and no businesses to use them)

 

I have studied and wrote on SRG and SHLDQ for 4 years and it’s clear from the legal pleadings that SRG and LE will be coming back to SHLDQ, so the best and cheapest way to buy SRG is to buy Sears Unsecured debt for pennies on the dollar and SHLDQ common stock at under .20 a share the return will be 50X or more.

 

The case is Sears Holdings v ESL and SRG/LE Case Number 18-23538>>

 

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

[shamelesscloner]

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

 

Why would a great investor like Mohnish Pabrai, who is singularly focused on 5-10x opportunities, buy 12.5% of the common equity in May 2020?

[bizaro86]

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

 

Why would a great investor like Mohnish Pabrai, who is singularly focused on 5-10x opportunities, buy 12.5% of the common equity in May 2020?

 

Without getting too far into the weeds on this, I would note that he has made a number of large, public mistakes in the past, and I don't see any reason why this couldnt be another.

 

The unsecureds are more than a 10x opportunity if you're right. Why not just do that? Why do the equity, which has a way higher bar for working out?

[RadMan24]

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

 

Why would a great investor like Mohnish Pabrai, who is singularly focused on 5-10x opportunities, buy 12.5% of the common equity in May 2020?

 

Without getting too far into the weeds on this, I would note that he has made a number of large, public mistakes in the past, and I don't see any reason why this couldnt be another.

 

The unsecureds are more than a 10x opportunity if you're right. Why not just do that? Why do the equity, which has a way higher bar for working out?

 

What unsecured security are you speaking of?

[Mephistopheles]

 

Without getting too far into the weeds on this, I would note that he has made a number of large, public mistakes in the past, and I don't see any reason why this couldnt be another.

 

The unsecureds are more than a 10x opportunity if you're right. Why not just do that? Why do the equity, which has a way higher bar for working out?

 

Did Pabrai buy SHLDQ? I must have missed this, where can we find it?

 

I know he did buy SRG.

[BG2008]

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

 

Why would a great investor like Mohnish Pabrai, who is singularly focused on 5-10x opportunities, buy 12.5% of the common equity in May 2020?

 

Horsehead anyone?  Horsehead? 

[bizaro86]

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

 

Why would a great investor like Mohnish Pabrai, who is singularly focused on 5-10x opportunities, buy 12.5% of the common equity in May 2020?

 

Without getting too far into the weeds on this, I would note that he has made a number of large, public mistakes in the past, and I don't see any reason why this couldnt be another.

 

The unsecureds are more than a 10x opportunity if you're right. Why not just do that? Why do the equity, which has a way higher bar for working out?

 

What unsecured security are you speaking of?

 

I was talking about the holdco unsecured debt, but (if I hypothetically wanted this) I would go even further up the capital structure. I still have a bit (exactly $1000 par value, actually) of '18 second lien debt that I bought at ~$30. It's trading at $6.70 per $100 of par value, so the second lien debt (which is senior both the unsecured and equity) is just pricing in option value right now. If I thought (which I don't) that SRG was going to end up in the hands of old Sears that is where I would buy - it is still >15X upside, but you're way higher in the capital stack.

 

As a side note, how I ended up with $1000 of par value is bit of a funny story. I bought a position after they filed (there is some good stuff in the SHLD thread about the debt, read the pages after the bankruptcy if you're serious about this). Subsequently, I changed my mind and put a limit order to sell the debt. All but $1000 of par value sold, so now I have ~$60 in market value of SHLD debt in my IBKR account. It trades in minimum increments of $2000 par value, so I can't even sell that piece without first buying $2000 in par value and trying to sell $3000 worth. The bid/ask is so wide that would likely be a cash negative thing to do, so I'm letting the position ride at this point. YOLO, and all that.

 

The security I own is ISIN: US812350AE65 and IBCID: 93564153

[RadMan24]

If you think its 100% clear that the SRG assets are going back to SHLDQ then you have what's known as a variant perception. If you're right, the debt there will be a multi bagger, as its trading at very low levels. I wouldn't fuss around with the equity, as even with SRG I doubt it gets anything.

 

Why would a great investor like Mohnish Pabrai, who is singularly focused on 5-10x opportunities, buy 12.5% of the common equity in May 2020?

 

Horsehead anyone?  Horsehead?

 

Horsehead was a major gamble by management to develop and construct a new recycling plant for zinc powder that has since and still has issues, even with new owners. Graftech was a bet on EAF steel and graphite prices which just got obliterated by the pandemic. SRG is a pick that has had the impairment occur prior to his initial investment, while in both Zinc and EAF, the impairment occurred after his investment, rendering the correlation quite differently.

 

Another flip side is, the investor base in SRG is quite different and filled with deep value investors, all with significant stakes. Although the idea originated from Buffett, and its at a fraction of his buying price, meaning something materially has changed since his first disclosed buy. We all know that's the shutdown and coronavirus impacted retail, commercial, and to an extent, residential  real estate. A significant chunk of SRG's properties are located in four hotspot areas - Florida, Texas, California, and Norhteast. It's unlikely these four segments of the U.S.don't recover and grow again post-pandemic. Further, a significant chunk of SRG properties are either restaurants, entertainment venues, or fitness retail tenants - all but movie theaters appear to have structural declines. Albeit, longer term trends could still occur, so SRG will have to manage new tenant growth profiles and ensure they create environments that cater to the needs of people post-pandemic, which is surely quite different than it was just 6 months ago.

 

SRG also has 3 dozen densification projects in the pipeline, and a significant chunk of SRG's properties are in suburban areas, which may benefit if people move off from dense urban areas. Taken as a whole, it doesn't seem as if there's a significant long-term dent in SRG's prospects, though this is subjective.

 

Rather, the stock has suffered greatly due to the rent deferrals, and cash burn of at least $9m a month during the height of the crisis, and delaying redevelopment projects for at least a year. SRG has received relief from its major lender (Berkshire) and has closed additional property sales raising funds. The SNOs that remain outstanding are also likely a cause for concern for investors, but there seems to be enough flexibility there in that regard to fix that situation in the short term by identifying new tenants if others are impaired.

 

[Saluki]

What do folks think of this play on SRG...

 

<<Sears Holdings Bankruptcy estate and the Unsecured Creditors Committee filed suit against Seritage Growth Properties and Lands End seeking an order of the court which would bring SRG and LE back to SHLDQ, which has $6B in NOL’s and tax credits (and no businesses to use them)

 

I have studied and wrote on SRG and SHLDQ for 4 years and it’s clear from the legal pleadings that SRG and LE will be coming back to SHLDQ, so the best and cheapest way to buy SRG is to buy Sears Unsecured debt for pennies on the dollar and SHLDQ common stock at under .20 a share the return will be 50X or more.

 

The case is Sears Holdings v ESL and SRG/LE Case Number 18-23538>>

 

I was thinking about this last night because I saw someone on YouTube saying SRG would get folded back into Sears.  As unlikely as I think it is that they would unwind this transaction 4 years after the fact, if you play out the scenario, it's an even stranger outcome.  Let's say, it was spun off at 35 and the price went to $100.  The insiders who bought got a deal (but so did members of the public who did nothing wrong).  If the court decides it was an unfair deal and makes everyone give it back, it would be at the spinoff price: $35.  So if I bought at recently at $100, they make me sell it back at $35, but the insider who bought at $35 and sold at $70, or the other guy who bought at $70 and sold at $90 get to keep their money? 

 

And it's not at $100 now, it's at $10.  So it doesn't look like such a bargain now.  So if the court says that it has to go back to Sears, will it go back at the firesale price of $35?  If so, I'll buy a lot more now.  And if a court did rule that it had to go back to Sears, why would sears want to pay $35 in a forced sale for something they can buy on the open market for $10?  They don't just give the stock back to Sears for free.  If Sears wants my common back at $35 and my preferreds at par, I'm okay with that. 

 

I think it's more likely that the bankruptcy trustee added everyone in every transaction that Sears was involved in, in order to preserve their claims and most of those will fall off or get settled for nuisance value to avoid having to pay legal fees and have a cloud over your stock.

[scorpioncapital]

99.9% it don't go back to sears.

[thepupil]

curious what you seritagians think of the latest pupilthepunterpromotion Urban Edge (which I don't own, but am considering)

 

Let's compare:

 

Seritage trades for $2B EV, owns 30mm square feet, has little cash, and is at the mercy of its lender who is charging 7% ($112mm interest/year). This is greater than pre/post covid NOI, so she's burning cash. Obviously the play is we got to lease/ redevelop all that space and get the big gains. the $66 / foot seems "cheap" and provides a low basis off which to create value through development.

 

Urban Edge Trades for $1.2B market cap + $1.5B of mortgages ($2.7B) and only owns 15mm sf so its obviously much more expensive on an EV/foot basis. Pre-covid (2019) EBITDA was $211mm and FFO was $156mm, much of which is/was being deployed into strip center/outparcel redevelopment. It is cash generative, has a pristine balance sheet, owns 40+ properties with no debt that are generating cash (~$80mm of NOI according to the company but I haven't dug enough here). I'm going to lazily use company pre-covid NAV as a bull case ($23).

 

So it has 130% upside, I'd say that's a good bit of reward. Urban Edge has $350mm of net corporate cash and $1B of total liquidity (times are such that many REITs I own quote cash + revolver capacity as a very high % of market cap, PGRE is the same way). So it has 30% of its market cap in cash and has a bunch of unlevered properties generating 6% of market cap / year in cash. that seems like low-ish risk profile (as low risk as any retail RE can be of course).

 

Unlike Seritage which is dependent on its lenders, Urban Edge holds all the power in its negotiations. For example, here we see Urban Edge, getting a portion of its debt on one property completely forgiven and preparing to hand back the keys on ~8% of its debt on a property that doesn't generate much NOI, all while buying back its own shares.

 

This is how the two speak to their bankers:

Seritage: Please Mr. Buffett give us some more capital at 7%.

 

Urban Edge: Nah man, I'm not going to pay you, either forgive the loan, or I'm going to give you the property. I've got shares to buy back man.

 

On June 1, 2020, the Company completed the refinancing of its mortgage loan at The Outlets at Montehiedra, a leading value-oriented

retail destination located in San Juan, Puerto Rico. The previous $119 million CMBS loan encumbering the property was due to mature

in July 2021 and consisted of an $83 million senior note bearing interest at 5.33% and a $30 million junior note, bearing interest at 3.0%,

including total accrued interest of $6 million. Based on the payoff provisions of the prior loan, the junior note including accrued interest

was forgiven and the senior loan was replaced by a new $82 million 10-year fixed rate mortgage, bearing interest at 5.00%. As a result

of the refinancing, the Company recognized a gain on extinguishment of debt of $34.9 million in the second quarter of 2020. With the

completion of this refinancing, the Company does not have any other debt maturities until May, 2022. Post refinancing, the weighted

average remaining term for all secured mortgage debt outstanding increased from approximately 5 years to 6 years, further enhancing

an already strong and liquid balance sheet.

In April, the Company defaulted on its $129 million non-recourse mortgage loan on Las Catalinas Mall in Puerto Rico, which now accrues

interest at a default rate of 7.43% (compared to the stated rate of 4.43%). Interest expense recognized in the second quarter of this year

was $2.4 million compared to $1.5 million in the second quarter of 2019. We remain in active negotiations with the servicer but no

determination has been made as to the timing or ultimate resolution of the debt restructuring that may arise from this process. The mall

generated $0.9 million of NOI in the second quarter of this year compared to $1.8 million in the second quarter of 2019. The Company's

net debt to Adjusted Earnings before interest, tax, depreciation and amortization for real estate ("EBITDAre") was 7.5x using our second

quarter's annualized EBITDAre and would have been 6.8x excluding Las Catalinas.

Pursuant to the Company's share repurchase program, 1.4 million common shares were repurchased during the quarter at a weighted

average share price of $7.98 for a total of $11.3 million. Under the program, the Company may repurchase up to $200 million of its common

shares. Total purchases made under the program to date in 2020 aggregate 5.9 million common shares at a weighted average share

price of $9.22 for a total of $54.1 million.

On August 6, 20

 

So I get that Urban Edge is much more expensive on a per foot basis and that you get very levered upside since SRG is down 75% YTD and the mark to market cap structure is so levered, but UE is down 45% and with all that net cash, the equity in its properties is down >45%, but I just wanted to demonstrate that there's a much lower risk way to own strip / retail real estate redevelopment.

 

I haven't really been following Seritage or really dug deep, mainly because I prefer my secular declining real estate with a healthy portion of actual cash flow.

 

Is the case for SRG that the upside is so high (2,3,5x+) that one would prefer SRG to UE. Am I making a bad comparison? Or are there elements of SRG that make it lower risk than I perceive?

 

 

 

 

 

[RadMan24]

SRG real estate values, sq ft, associated income can go up dramatically, when you re-purpose auto lots, densify, etc.

 

SRG current lease rate is around 37%. Any tenants they lease to from here on out would 1.) Survived the crisis and 2.) Be growing.

 

So, I foresee very little comparison with Urban Edge. Asset sales at SRG are also providing sufficient coverage of interest payments, so the leverage isn't a major concern 1+ year out.

 

That's not to say it can't go south, but the odds still look favorable.

 

Edit: Also, don't forget the major properties SRG is developing that are worth more than the equity itself.

[Ballinvarosig Investors]

I think the stock is worthy of more investigation.

 

On the Q2 numbers, revenue was bad, really bad. The top line didn't even cover the interest expense for the quarter and that is clearly not sustainable. With that said, I don't think we'll ever get a quarter where revenue is so bad again. Unless we get some sort of nightmare COVID scenario, Q3 and Q4 should show decent improvement from here. $100m of asset sales were needed to cover some of the losses. Getting some colour on the asset disposals is where my interest piqued a little.

During the three months ended June 30, 2020:

• Sold nine properties and three outparcels for gross proceeds of $98.6 million and recorded gains totaling $53.9 million; and
  

The Q2 sales look to be a bit under 5% of the total Seritage properties (in terms of quantity of sites, not sq/ft).

As of August 4, 2020:

• Sold 13 assets and five outparcels for gross proceeds of $166.3 million year to date; and
  
• Had assets under contract for sale representing anticipated gross proceeds of $91.5 million, subject to buyer diligence and closing conditions.
  

Looks $166m of disposals representing about 7-8% of Seritage's total properties. The Q2 figure and the confirmed sales for Q3 seem to be broadly in-line in terms of valuation. I don't know if these 12-13% of properties that have been confirmed as sold are of better or worse quality than what remains. Has anyone got any thoughts?

 

If you take it that the remaining properties have an equivalent value of to that of what's already been sold, you have a current market value of $2.2b for the real estate. Assuming the current assets/liabilities net out, then take off the net debt position of $1.5b, take off the preferred stock that's redeemable and you get remaining value of $630m against a market cap of $380m. Commercial real estate isn't exactly doing well now, also I haven't taken into account any gains from redevelopment, so there's probably some extra value on top of what looks like a worse case scenario. As a pure asset liquidation play on today's valuation, it does look cheap.

[dharmapu]

I would agree that this could be the worst quarter for SRG given COVID-19.  From their earnings report I also saw that they collected 74% of July Rent.  From a book value play (real estate investments worth close to 2.0B and current market cap of 435 MM (stock price : 11.37$ today) it does seem an interesting play.  In 2020 they have also been able to sell properties while paying debt commitments.

[thepupil]

Asset sales at SRG are also providing sufficient coverage of interest payments, so the leverage isn't a major concern 1+ year out

 

not my preferred way to pay interest lol.

 

Edit: Also, don't forget the major properties SRG is developing that are worth more than the equity itself.

 

Mind helping me get up to speed here? what are the "major properties" that they can sell to help pay down the term loan? how much NOI (if any) is associated therewith?

[realassetsvalue]

I think the stock is worthy of more investigation.

 

On the Q2 numbers, revenue was bad, really bad. The top line didn't even cover the interest expense for the quarter and that is clearly not sustainable. With that said, I don't think we'll ever get a quarter where revenue is so bad again. Unless we get some sort of nightmare COVID scenario, Q3 and Q4 should show decent improvement from here. $100m of asset sales were needed to cover some of the losses. Getting some colour on the asset disposals is where my interest piqued a little.

During the three months ended June 30, 2020:

• Sold nine properties and three outparcels for gross proceeds of $98.6 million and recorded gains totaling $53.9 million; and
  

The Q2 sales look to be a bit under 5% of the total Seritage properties (in terms of quantity of sites, not sq/ft).

As of August 4, 2020:

• Sold 13 assets and five outparcels for gross proceeds of $166.3 million year to date; and
  
• Had assets under contract for sale representing anticipated gross proceeds of $91.5 million, subject to buyer diligence and closing conditions.
  

Looks $166m of disposals representing about 7-8% of Seritage's total properties. The Q2 figure and the confirmed sales for Q3 seem to be broadly in-line in terms of valuation. I don't know if these 12-13% of properties that have been confirmed as sold are of better or worse quality than what remains. Has anyone got any thoughts?

 

If you take it that the remaining properties have an equivalent value of to that of what's already been sold, you have a current market value of $2.2b for the real estate. Assuming the current assets/liabilities net out, then take off the net debt position of $1.5b, take off the preferred stock that's redeemable and you get remaining value of $630m against a market cap of $380m. Commercial real estate isn't exactly doing well now, also I haven't taken into account any gains from redevelopment, so there's probably some extra value on top of what looks like a worse case scenario. As a pure asset liquidation play on today's valuation, it does look cheap.

 

An element to keep in mind is that while there are 38.6 million common shares outstanding there are also 17.3 million OP units for total share equivalents of 55.6 million. Based on today's close at 11.40 a share, the market cap is $630 million - right around the "extrapolated value" of the portfolio that Ballinvarosig, you laid out.

 

I want to like Seritage. I bought some early and sold out at a substantial loss once I understood COVID was going to shut everything down (took me longer than it should have!). They own some great dirt and have done a good job of repositioning a bunch of their locations. The potential of their mixed-use sites is exciting. However, I just don't see how they get there without someone else - a buyer of the business, their lenders, JV partners, etc. - taking the bulk of the economics.

 

Mohnish Pabrai is a lot smarter than I am and got super long so I am ready to be wrong but for me the key variables are:

[*]You need $150m of NOI to reach breakeven - Q2 2020 annualized G&A is $34m, Interest on the Berkshire loan is $112m, the preferred distributions are about $5m

[*]Q2 2020 annualized NOI is about $30m, this leaves $120m of NOI that needs to be produced through the development pipeline.

[*]This will take capital. How much? They highlight in the supplemental that the in-progress pipeline they are picking back up will produce 12.7m of rent (lets say that's all NOI) at a cost of $43 million. Good yield on cost because they were part way through. This leaves another $107m of NOI to build out. Historically they have done c. 10% yield on cost (~$80m of NOI on ~$800m of redevelopment spend) but lets say construction costs go down and they can do 12% yield on cost now. If so, they need ~$890m in capital spending to reach breakeven.

[*]Where will this capital come from? Well Berkshire could relax their requirement that SRG reaches $200m of annual rent from non-Sears tenants, this could unlock the $400m future funding. The rest will have to be asset sales or JVs, etc., which doesn't seem impossible

[*]What makes the hill steeper to climb, however, is the fact that they are burning $9m a month in cash at the Q2 2020 run rate. As redevelopments come online, that cash burn will decrease but the bulk of the value of assets they've sold are finished developments.

[*]They've been selling their redeveloped properties at a 6% cap rate, which is pretty good for US strip / mall retail currently. If you apply that cap rate to their portfolio once they reach $150m NOI / cash flow break even - assuming that some projects are better, i.e. their Santa Monica office development, and some are worse, in secondary / teriary markets, etc. - that's a gross value of $2.5 billion. That's about 10% above the total market capitalization of the company today, which doesn't feel like a good risk / reward to me given the challenges that seem apparent to reaching $150m of NOI.

 

Feels like a heavy lift to me and they need capital to do it. I don't see why their funding partner won't seek a deal that takes the majority or all of the economics from the common but interested to hear why my analysis is off base.

[scorpioncapital]

Isn't real estate in part a speculation on inflation? if that is the future scenario, they could be generating much higher NOI then anyone can imagine.

Likewise, the person who said that now SRG can rent to the 'survivor' tenants is spot on. This is why being a landlord is far superior to the previous Sears business. You get paid by whoever rents your space, and necessarily that is always someone who has survived. If they fold, you rent it to the next tenant. Sure there is some changing hands and inefficiency there but the point is that it is more valuable in commercial real estate to just collect rents and not care so much about the business model or marketing strategies of your tenants. It is much easier problem to rent to someone than to figure out how to have made Sears work with marketing programs, inventory, etc...

Always be the house, both in casino, stock broker, or real estate.

[glorysk87]

 

• Q2 2020 annualized NOI is about $30m, this leaves $120m of NOI that needs to be produced through the development pipeline.

 

 

Why would you annualize 2Q20 as the baseline NOI? It's essentially the cyclical low for NOI.

[BG2008]

I am going to say something that is a bit douchey.  But it should be said.  Even thought GRIF has gone up $15 this year.  The NAV is probably over $70 and the current price is $53-54.  I think it will actually trade to $70 at some point.  One thing that I learned about real estate investing is to never invest in something that is in secular decline.  Everyday, Amazon and E-Commerce encroach upon the traditional brick and mortar retail.  Everyday the E-commerce's route density improves further driving down unit cost of delivery.  I think the issues are structural rather than cyclical (yes, it's my asshole opinion.) Since we are pricing things at 6% cap rate. This implies that it will take 14 years or so to be completely paid back.  Thus the Terminal Value for real asset valuation (or at least the perception of the sustainability of terminal value is incredibly important).  If you own an asset that could be deemed as unsustainable in 5-10 years in the real estate space, you should not own it at any price.  I have said this about Washington Prime, Macy's (which I lost money in), and a bunch of B and C malls.  Frankly, SRG, would be worth more as hundreds of patches of prime dirt. 

 

Munger said something about "it's not what floor you are on.  It's about whether you are going up or down."  GRIF is going up and traditional retail is going down.  Every year I go to Fairfax, I have 20 people who ask me about SRG.  It's not under the radar.  It is being heavily investigated by value investors.  I remember saying about this in the Macy's thread and I hope I had convinced a few folks to swap their Macy's for GRIF.  Own the stuff that is sustainable.  Because you're not paying 4x FCF and getting the dividend out.  You're bet on 14 year time horizons.  Who cares that you can develop to an 10-12% cash on cash yield.  If by year 5-7 these assets will be priced at 13-14% cap rate, it doesn't matter anymore. 

 

Now you layer on interest coverage.  There is a dynamic of burning furniture to stay warm coupled with structure headwinds.  Most of the involved do not have real estate background.  They are generalists who do not understand the nuances. 

[thepupil]

Frankly, SRG, would be worth more as hundreds of patches of prime dirt. 

 

Isn’t this the bull case?

 

BG, I mostly agree with you (though am willing to own some retail at a price And I think there’s a place for grocery/ Home Depot/ gyms, etc.), but see the capital structure / cash burn as the primary issue either rather than secular decline. In theory the 2700 acres and 30mm sf could be put to use if it’s well located (and it has to some degree). In practice, Berkshire is taking 100%+ of the economics, net debt isn’t really decreasing while they sell assets.

 

I don’t see how that changes in a way that’s friendly to the common. I don’t think a bank/CRE debt fund/or whatever is saying “oooo can’t wait to refi the $1.6B Berkshire loan to a reasonable rate”.

 

It’s pretty shocking to me the equity in this trades for over $600mm. I understand capital structure can change; but does any long have an idea of what that might look like. I could maybe see a PE fund injecting capital via a convertible preferred to fund development and simultaneously refi the Berkshire loan as it’s be lower LTV then, but Opportunity funds need to make 15-20%+ gross IRR so that won’t be cheap capital. Maybe the solution is a rights offering / equity offering.

 

Can a long bridge the gap? show me how they get a refi done in 3 years?

 

[peridotcapital]

 

• Q2 2020 annualized NOI is about $30m, this leaves $120m of NOI that needs to be produced through the development pipeline.

 

 

Why would you annualize 2Q20 as the baseline NOI? It's essentially the cyclical low for NOI.

 

Signed leases ex Sears amounts to $165M of annual rent. Interest, G&A, and pref divs total about $130M. If rent collections are in the mid 70's today and trend back towards 100% over the next 6 months (I know this is probably a fairly optimistic assumption), it doesn't seem like they will need to raise too much capital by selling off more assets. Will they have to JV out more of the high end pipeline and move more slowly than they were thinking 6 months ago? Sure, but it doesn't seem like the base case here is they have to get a big equity infusion to keep going and the existing equity gets massively diluted.

[thepupil]

Thanks peridot, by g&a do you mean SRG level corporate overhead or also property operating expenses? What do you see as the current run rate property level NOI (Ie not including corporate g&a) but including regular operating expenses like property taxes, maintainance, etc?

 

For example, Urban Edge which owns similar-ish properties at similar-ish rent per foot had a pre-covid cash NOI margin in the low 60% range.

 

So would a guesstimate of SRG run rate NOI ex sears be  $165mm of rent *60% = $100mm NOI?

 

That's less than the annualized interest and at a 6.5% cap rate (UE trades at a 9% and again is unlevered and cash rich) would not cover the debt or give comfort to a more friendly refi. I understand there’s a lot more space to lease up but that requires capital and a higher cost of capital equity check right?

 

I'm basically trying to understand how they refi, $100mm NOI isn't going to do it. that's a 6% debt yield on the Berkshire loan. so they use some cash + asset sales to develop more and get to what? $120? $130? $150?, still not an attractive cap rate.

 

what am i missing here? I assume what I'm missing is there's some part of this giant land bank to sell for lots that requires little capital and can be monetized to de-lever. Any ideas/specific properties?

 

I'll offer an example, SRG owns a WaMu Branch a big parking lot and an old sears box in my hometown, affluent booming Boca Raton. I'm sure that land is very valuable. It's been an empty box for 2 years and Simon is suing them because they say they have a ROFO if the space will be something besides retail. I think I once looked up the tax value of this Sears box for fun and it was high, but if they sold that for $20mm right now, I think it'd all go to Warren and friends.

https://www.palmbeachpost.com/news/20191105/boca-ratonrsquos-town-center-mall-sues-owner-of-sears-property