SRG - Seritage Growth Properties

[bizaro86]

The revenue recognition is based on straight lined rents, which is required by GAAP. So say you have a lease with 10 years at $5, 10 years at $10, 10 years at $15. The revenue from the lease is recognized as a straight $10 the entire time, as that is the average.

 

If they don't straight line the average base rent metric that could explain the difference. Given how new their leases are, most of them won't have made it through escalations yet. So revenue reported will be consistently bigger than cash received.

[davel]

thanks for the fast reply!

 

I thought first the same, but then again the straight-line rent adjustments in the cash flow statement are very low, so they can't explain the full difference. Also they vary between positive and negative (-15.6mn, 2.8mn, -3.7mn for 2019, 2018 and 2017.)

[realassetsvalue]

I haven't looked carefully at the numbers but I would assume that two significant factors are that (A) Sears stores have been closing progressively over time (and paying termination fees) and (B) that Seritage has recebtly been selling some redeveloped, stabilized properties, the TTM rent figures include rent from these soruces but they are not factored into the annualized rent number. Could that explain the delta?

[davel]

thanks a lot also for your suggestions! These do however also not yet make up for the entire difference. Below a quick overview of the items I now used in the adjustment and which ones not (for what reason)

 

- straight line recognition (is used in adj. - but rather small)

- termination fee (is used in adj. - but rather small)

- gains on property sales (not used in adj. since not part of "Total revenue")

- mgmt and other fee income (is used in adj.- but rather small)

- sale of redeveloped, stabilized properties (is used in adj. - here I used a 6% cap rate to identify (roughly) revenue loss based on transaction values - also rather small)

 

Even after making all these adjustments, ttm revenue is still on average 50mn above ABR (see image).

 

I think while writing this I figured it out:) I think it's the tenant reimbursements, which are since 2019 classified as rental income. In 2018, these accounted for 57mn and in 2017 for 62mn. Assuming that the 2019 value is also ca. 25% of total revenue (like in 2017 & 2018) we get close to the remaining 50mn delta.

In the second graph you can see how well the ABR adjusted by the points above + tenant reimbursements fits the ttm revenue

 

thanks a lot guys!!

[Foreign Tuffett]

CFO just sold 10K shares

 

https://www.sec.gov/Archives/edgar/data/1600056/000089534520000914/xslF345X03/form4.xml

 

And now the CFO is out

 

https://www.sec.gov/Archives/edgar/data/1628063/000114036120024727/brhc10016686_ex99-1.htm

[thepupil]

SRG sold $100mm+ of property

 

Cash + Rec. went from          $146mm to $157mm  +$11mm

Accounts Payable went from    $168mm to $184mm  +$16mm

 

Net debt did not change, while they sold $100mm of assets. no deleveraging happening. <—-I guess to be fair I should look at their capex/development too.

 

total run rate revenue (including signed not opened) =  $165mm.

Guestimmate of run rate opex and taxes                  = $71mm

Eventual NOI $91mm run rate

 

if we count G&A: $65mm

 

total run rate interest expense: $111mm

 

Normalized DSCR = 0.8x

With G&A            = 0.6x

 

Berkshire owns these assets until proven otherwise. I understand there are tons of non-earning assets here.

 

I don't understand how they can be sold at a pace that they don't just feed Uncle Warren's coupons. Maybe there's some super valuable ones on the come. 

 

To me it seems they need to raise lot of equity and refi the debt. That seems in the best interest of shareholders as piecemeal capital raises from asset sales don’t delever the company.

 

Also it seems like they kept the run rate revenue flat at $165mm despite signing some leases. I’m assuming the difference is for assets sold and/or vacancies?

 

The treadmill of interest and retail headwinds seems to be at roughly the same speed as asset sales.

 

Is anyone interpreting the results differently?

 

 

[BG2008]

SRG sold $100mm+ of property

 

Cash + Rec. went from          $146mm to $157mm  +$11mm

Accounts Payable went from    $168mm to $184mm  +$16mm

 

Net debt did not change, while they sold $100mm of assets. no deleveraging happening.

 

total run rate revenue (including signed not opened) =  $165mm.

Guestimmate of run rate opex and taxes                  = $71mm

Eventual NOI $91mm run rate

 

if we count G&A: $65mm

 

total run rate interest expense: $111mm

With G&A

 

Normalized DSCR = 0.8x

With G&A            = 0.6x

 

Berkshire owns these assets until proven otherwise. I understand there are tons of non-earning assets here.

 

I don't understand how they can be sold at a pace that they don't just feed Uncle Warren's coupons. Maybe there's some super valuable ones on the come.

 

You mean like Santa Monica?  130k sqft @ $55 (just ballparking based on Loopnet) yields $7.2mm in rent

[shamelesscloner]

How are folks interpreting the departure of Brian Dickman?

[realassetsvalue]

On the CFO departure, I have nothing to add.

 

The Santa Monica property will definitely be of great value once leased. Finding a big office tenant, even for primo West LA real estate, just got a whole lot harder with COVID. I think that project will get leased and be very valuable but it will probably take a while - like years not months (but now I've said it I am sure they lease it up quick).

 

One risk is that a lot of their most valuable properties are in JVs with better capitalized partners who are in a great position to buy SRG out at advantageous prices. As an example, Simon Property Group have elected to not start redeveloping any of the Sears boxes in their JV with Seritage - all are vacant. I presume they are waiting Seritage out in order to buy those sites at firesale prices and not need to share the upside... Both Santa Monica and La Jolla are with Invesco and I think they have more time on the clock than SRG does.

 

I think Pupil has accurately described the Q3 results. Selling the vacant / small assets for ~$40 PSF and lowering the operating cash outflow from taxes, etc. is good. Getting a 5.9% cap on the income producing sales they are achieving feels very good in this market and reflects that the locations they have are very strong. However, as they sell income-producing assets to plug the operating cash outflow, it gets harder and harder to get to "escape velocity" where recurring income and asset sales covers not only running costs but provides the capital they need to build out their projects.

 

Q3 2020 NOI was $6m, which is ~$25m annualized, down slightly from Q2 2020. G&A is on track for $40m a year, annual interest is $115m and the pref is $5m a year. Thus Q2 2020 run rate cash burn is $135m a year or about $11m a month. Unless they refinance the debt, this is the amount of NOI they need to get in place to break even. From their Term Loan amendment it looks like they can defer interest payments if their cash balance gets below a certain threshold and that will definitely buy time.

 

However, it sounds like they need years to get the SNO developments finished and cash flowing - they keep highlighting the potential annual rent of $13.5m that will cost ~$30m in CAPEX to unlock over the next 12 months. In-place leases total $100m ($5m from Sears, $95m third party) with about $65m of signed leases. They need to take this total to $200m excluding the Sears leases to access Berkshires additional $400m facility - in the pre-COVID environment it would take at least a year to sign that many leases (based on their 2017-2019 pace) assuming they were to sell none of their income producing properties... That in of itself may be tough to accomplished. Berkshire might give them access to the $400m - they definitely have been constructive in working with SRG - but the question is what they will want in return?

 

COVID really came at the worst possible time for SRG. You can see that while they were signing $40m - $45m of leases per year in 2017 - 2019, their on track to only sign $7.5m in 2020. Pre-COVID, they were really close to getting to having the leases signed and capital in place to reach a stablized NOI that would cover their costs and generate the capital to reinvest in building out the bigger projects. This environment is just a knife fight it feels like. As leases get cancelled by retailers scaling back their growth plans, that's also shrinking the SNO lease pool. This is why development is risky - even with great locations and a good team, if you get the timing wrong, things get really really hard.

 

The crown jewels are definitely their large-scale projects that have great potential - mixed use, the 6,500+ multifamily units they are getting permits for. I just can't see a path for current equity holders to unlock those projects without major dilution in the best case. This is one I am monitoring to see if there is reason to think that they will get to escape velocity on the redevelopment program with rents starting to cover the fixed costs or if there is a recapitalization of some sort.

 

But I know I am one of the more negative voices on this one on this board - any more positive takes?

 

 

[RadMan24]

Yea, it's called a vaccine.

[thepupil]

Yea, it's called a vaccine.

 

that's not a reason to own SRG specifically, is it?

 

UE      +35%

SRG    +29%

SPG    +26%

MAC    +32%

KIM      +30%

 

[RadMan24]

Yea, it's called a vaccine.

 

that's not a reason to own SRG specifically, is it?

 

UE      +35%

SRG    +29%

SPG    +26%

MAC    +32%

KIM      +30%

 

 

Coming from someone who is constantly looks in the weeds rather than the forest, I'm not surprised you came to that perspective. 

[thepupil]

I see. Guess I should stop focusing on the minutiae of capital structure, debt service, lease revenue, NOI and refinancing risk and instead keep in mind the big picture, such as the secular bullish tailwinds for retail real estate.

 

this conversation is clearly not productive. will revisit when we have more fundamental news. we'll make it a quarterly ritual of seeing if SRG grew lease revenue/NOI  enough or sold enough assets or raised enough equity to look to be in a sustainable position.

 

don't really understand the hostility. but whatever.

 

 

 

 

[Foreign Tuffett]

I see. Guess I should stop focusing on the minutiae of capital structure, debt service, lease revenue, NOI and refinancing risk and instead keep in mind the big picture, such as the secular bullish tailwinds for retail real estate.

 

this conversation is clearly not productive. will revisit when we have more fundamental news. we'll make it a quarterly ritual of seeing if SRG grew lease revenue/NOI  enough or sold enough assets or raised enough equity to look to be in a sustainable position.

 

don't really understand the hostility. but whatever.

 

thepupil although I won't pretend that I follow this closely anymore (and so haven't attempted to duplicate your math) I agree with the basic gist of your recent posts.

 

The CFO resigning is also a huge red flag given the company's weak liquidity position. If this was a name I owned I would have broken out in a cold sweat when I saw that 8-K. 

 

To reiterate (shamelessly borrow?) something realassetsvalue posted: It is unclear how SRG reaches "escape velocity"

 

 

[BG2008]

Money is cheap for companies that doesn't have perceived terminal risk 

The credit market is bifurcated into 1-3% cost of debt for those that are sustainable and growing even just 1-2% a year for the foreseeable future and usurious rates for assets that are deemed to have 10-15 year lives

 

I don't know what the psychological phenomenon is called.  Maybe there is a name for it.  People constantly ask me for my opinions on SRG and retail real estate investing in general.  I was approached by 20 people at an event once for my opinion on SRG.  It is almost like people are seeking confirmation that it is a good investment.  When I tell them I don't like it because it's just too hard for me.  The Amazon risk is too high.  Developments are risky.  Shit happens.  They somehow justifies it with Buffet/Munger, potential multi-bagger etc.  It is the most bizarre and weirdest psychological reaction.  I am probably being an asshole for pointing this out.  But it's a very peculiar phenomenon that I only observe with SRG, mall and retail real estate investing.  It's almost like people have made up their mind already and when I offer the bear case, they find a way to refute it.  I think I need to permanently walk around with a sign that says "no opinions on retail real estate investing."     

 

Maybe, the problem is that I am the asshole and I constantly project my negative views on SRG and I need to shut the F up.  No one needs a Debbie Downer.   

 

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade. 

[RadMan24]

Look, all three of you have good points and they are well taken. Nevertheless, let's see where the company stands 12 months from now and if all the liquidity concerns, redevelopment risks, and CFO leaving have taken a turn for the worst. The company has plenty of capital on hand the last time I checked.

 

And to BG's point, there are a lot of debbie downer's on this topic and post, which does drive some hostility.

 

A recent SA article outlines some of the risks and counterweights quite well. But I think this idea has been beaten to a pulp whether its a good or bad one.

 

fwiw, the former SRG CFO went to Getty Realty.

[Anglozurich]

A few referenced Bruce Flatt's Bloomberg interview on the BAM thread. On malls, he was relatively positive and stated that valuations of higher quality assets have way more room to move up given rates have been pushed down. He also said if there are 8 malls in a secondary or tertiary location, the bottom 4 will die but the top 4 will survive and be better because of it. A good few of these old Sears locations are high quality. Many of SRG's assets are not in the bottom 50% purely on the basis of location, even before redevelopment.

 

The jury is still out. This one has to play out but on the scoreboard. Thus far, Pabrai is looking good. Thats a 3x since the depths of the pandemic.

[thepupil]

amen on the scoreboard, no idea why the equity is worth $1.1B/ EV is $2.7B, but credit where its due.

 

SRG is SuRG-ing !

[Lollapalooza]

Hmm.. and now is the CEO who leaves. Is that smoke on the horizon?

[Foreign Tuffett]

Hmm.. and now is the CEO who leaves. Is that smoke on the horizon?

 

Definitely a troubling development, particularly given that no successor is lined up

 

http://ir.seritage.com/news/news-details/2020/Seritage-Growth-Properties-Announces-CEO-Transition/default.aspx

[BG2008]

Hmm.. and now is the CEO who leaves. Is that smoke on the horizon?

 

Definitely a troubling development, particularly given that no successor is lined up

 

http://ir.seritage.com/news/news-details/2020/Seritage-Growth-Properties-Announces-CEO-Transition/default.aspx

 

I think Ben is very important to the thesis. 

[RadMan24]

Hmm.. and now is the CEO who leaves. Is that smoke on the horizon?

 

Definitely a troubling development, particularly given that no successor is lined up

 

http://ir.seritage.com/news/news-details/2020/Seritage-Growth-Properties-Announces-CEO-Transition/default.aspx

 

I think Ben is very important to the thesis.

 

CFO and CEO gone, CFO replaced internally, we'll just have to wait and see whose appointed as the CEO. Ben went to Avalon Bay. Probably not a bad move on his part, the incentives from SRG probably wore off.  https://www.businesswire.com/news/home/20201210006020/en/AvalonBay-Communities-Inc.-Appoints-Benjamin-Schall-President-and-Announces-CEO-Succession-Plan

 

Opinions can flout on how troubling it is. I put it mildly concerning, with everything on pause, it's not a deal breaker, nor a crux to the thesis. Ben had experience to do the job, but he wasn't a boom or bust piece of the puzzle. I'm willing to bet they find someone willing to take on this challenge, the incentives are there, and fresh perspectives in a post-covid world would not be bad.

 

[scorpioncapital]

why is this bad ? he has not exactly done a great job for shareholders. true the covid came in but they were pretty overleveraged even before. might a new CEO do a better job, be more aggressive in focusing?

[Foreign Tuffett]

why is this bad ? he has not exactly done a great job for shareholders. true the covid came in but they were pretty overleveraged even before. might a new CEO do a better job, be more aggressive in focusing?

 

Schall could only play the cards he was dealt. Attempting to redevelop a huge number of Sears boxes has been a Sisyphean task over the past few years.

 

SRG should tried to raise money by issuing shares back when it was trading at $45+. But Eddie Lampert probably hates issuing new shares just as much as he loves buybacks.

 

 

 

 

 

[Gregmal]

Yes, they'll have to bring in a new CEO, which means several months searching, a new(sorry no refunds from the last guy) compensation package loaded with more freebie shares, and worst part for shareholders, another 2-3 years of honeymoon where the CEO can rightfully or not, make excuses and talk about the bigger picture/long term without consequences.