SRG - Seritage Growth Properties

[BG2008]

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?

 

You guys ever heard of Germany trying to fight the US and Russia on 2 fronts during WWII?  Seritage is like trying to fight hundreds of local municipalities.  Unlike AirBnB, they don't have silicon valley throwing money at them like degenerate sailors on leave at a strip club. 

[Salil1983]

I'll hazard a prediction - the next CEO could be another internal candidate - Kenneth T. Lombard, Executive Vice President and COO, Seritage Growth Properties.

 

Listen to his talk with Mike Milken in the midst of the pandemic on how Seritage is creating value and why Seritage is uniquely positioned in a market with excess real estate.

 

https://milkeninstitute.org/podcast/ep-78-tipping-point-seritage-growth-properties-kenneth-t-lombard

 

Conversations_with_MM_-_Ken_Lombard_July_8_2020.pdf

[BG2008]

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?

 

You guys ever heard of Germany trying to fight the US and Russia on 2 fronts during WWII?  Seritage is like trying to fight hundreds of local municipalities.  Unlike AirBnB, they don't have silicon valley throwing money at them like degenerate sailors on leave at a strip club.

 

In one situation, you can hire young talented kids and lure them with IPOs and stock comps.  In the other situation, the leaders who can take over for Avalon Bay is going to go there.  You will likely be left with the B or C candidate in the long run. 

[Foreign Tuffett]

I'll hazard a prediction - the next CEO could be another internal candidate - Kenneth T. Lombard, Executive Vice President and COO, Seritage Growth Properties.

 

Listen to his talk with Mike Milken in the midst of the pandemic on how Setiage is creating value and why Seritate is uniquely positioned in a market with excess real estate.

 

https://milkeninstitute.org/podcast/ep-78-tipping-point-seritage-growth-properties-kenneth-t-lombard

 

Thanks for sharing that well-informed opinion

[RadMan24]

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?

 

You guys ever heard of Germany trying to fight the US and Russia on 2 fronts during WWII?  Seritage is like trying to fight hundreds of local municipalities.  Unlike AirBnB, they don't have silicon valley throwing money at them like degenerate sailors on leave at a strip club.

 

In one situation, you can hire young talented kids and lure them with IPOs and stock comps.  In the other situation, the leaders who can take over for Avalon Bay is going to go there.  You will likely be left with the B or C candidate in the long run.

 

Silicon valley hire anyone other than white guys?

[Gregmal]

Since liberals now consider Indians, Asians, and Florida Hispanics "white", I can definitively answer your question with a resounding, NO!

[RadMan24]

Since liberals now consider Indians, Asians, and Florida Hispanics "white", I can definitively answer your question with a resounding, NO!

 

lol.

 

I mean, I get the whole Silicon Valley attracts talent, and that Airbnb might be tough to beat incentive wise (excluding the fact those 10-year options would be expiring without this IPO), but most venture capital funded founders are -- white & male. When someone (not implying you) says all that is left is B or C talent, that mentality ignores the fact they could easily be A talent. They just didn't go to the big name school, nor got a resume shinning opportunity right out of school. They might not have that Power 5 Pedigree (stealing a football analogy), but they got the talent, hardwork, and chops to make it happen.

[bizaro86]

Since liberals now consider Indians, Asians, and Florida Hispanics "white", I can definitively answer your question with a resounding, NO!

 

lol.

 

I mean, I get the whole Silicon Valley attracts talent, and that Airbnb might be tough to beat incentive wise (excluding the fact those 10-year options would be expiring without this IPO), but most venture capital funded founders are -- white & male. When someone (not implying you) says all that is left is B or C talent, that mentality ignores the fact they could easily be A talent. They just didn't go to the big name school, nor got a resume shinning opportunity right out of school. They might not have that Power 5 Pedigree (stealing a football analogy), but they got the talent, hardwork, and chops to make it happen.

 

Come on now. You're forgetting that Silicon Valley founders are also from well off families and top 5 schools, aside from being white and male.

[scorpioncapital]

I can see why Schall went to a 23 billion company vs a now 600m company and a long slog. The cfo went to Getty reit, gas stations..The question is do they really think this is a long slog? For example, how long do people think it will be before SRG earns a $2/share dividend, that would be 50% of a net 200m FFO/year. Are they even close to this target?

[thepupil]

I can see why Schall went to a 23 billion company vs a now 600m company and a long slog. The cfo went to Getty reit, gas stations..The question is do they really think this is a long slog? For example, how long do people think it will be before SRG earns a $2/share dividend, that would be 50% of a net 200m FFO/year. Are they even close to this target?

 

Considering that SRG has more g&a and interest expense than rental revenue, no they are not close to this target (is that a company provided target?).

 

Also, don’t forget the OP units and shortchange her, SRG is an $800mm company!

 

I continue to be surprised they haven’t raised equity. With all the short interest, I actually think presenting a plan for a sustainable cap structure and raising money/refinancing would cause the stock to go up, but that’s about as far as I’ll go with SRG analysis and predictions (fleshed out below)

 

I did notice their cash figures released with CEO announcement. In isolation, they don’t indicate that SRG will have reduced net debt in the 4Q despite asset sales as they are in line with 3Q cash figures (though we need to see investment activity and payables balance to know more)

 

EDIT: it’s repetitive, but also think it’s worthwhile to point out that even if they can refi at a lower rate a few years out, the existing Berkshire note is interest only, so debt service won’t go down much if the new lender requires amortization. Under a standard 10 year fixed with 30 year amortization (CMBS conduit and lifeCo) loan the payment on $1.6B of debt at 4.5 -5.5% would be $97mm - $108mm / year. If SRG needs to borrow the additional $400mm then you’re looking at $120-$135mm.

 

Compare this to their current IO of $112mm / year. Only in the 4.5% refi are you decreasing debt service. Never mind the fact that no one is making $1.6B retail loans.

 

This is why I think they need to raise capital sooner rather than later, so that asset sales proceeds don’t just flow into Omaha for the duration of the note only to still be overlevered at the end.

 

I’ve been trying to think how / why this characterization could be wrong and the 5500 units of multi family development  intrigue me. At $60K/unit of land contribution that could be $330mm (this is an extremely rough spitball, happy to be corrected, as to why higher/lower)

 

EDIT II: just to play investment banker/ CEO this AM. How do you all think the stock would react if SRG announced a plan to raise $200mm / year of equity via rights offerings for the next 5-10 years in coordination with an agreement with Berkshire to a) extend b) reduce rate. SRG could then borrow at the asset level for new developments at 50% LTV ($100mm/year) to amortize/replace the Berkshire note. I think announcing such a plan would increase the stock px rather than cause a dilution death spiral, because it would give clarity and show how this becomes a real company (and it’d completely remove the BK / forced dilution / maturity wall short thesis.

[kaioji]

Hey guys

 

Been learning about SRG for the past 3 months and spent ~20-25hours the last few days going deeper.

 

This is how I see the situation.

 

SRG's biggest challenge is time. Like some of you have mentioned, they talked about the low hanging fruit that they can unlock. However, the rest of the SNO are a few quarters out AND even with that, they wouldn't be at the 200M NOI goal.

 

I don't think they should be going after the 200M NOI.

Their current pipeline is ~165M. To get another 35M it'll take about 1.9M SF (at their average of ABR 18.34 PSF). Considering they have only signed .27M YTD and on average ~2.3M /year precovid, it would take at least another year to sign (highly optimistic) the deals at rates precovid PLUS another 1 year+ to deliver. Not to mention ~370M of capex at their average cost to develop each SF (2019 annual report under 'Retail Development')

 

At maintenance operating cash burn of ~241M /year:

1600M @ 7% + 400M @ 1 1% = 116M

Preferred = 4.9M

Property operating  ~40M

Property taxes ~40M

G&A ~40M

 

You would need 480M over 2 years + additional 370M capex = 850M to get that 35M NOI + another 400-500M to unlock the other SNO rent

And of course, you'd also be selling more stabilized properties in order to do it...

 

That said, this is what I'm thinking the bridge can be.

 

SRG has broken out their property portfolio (finally)

I've guesstimated which property goes where by going through each one and trying to figure out what the common threads are.

 

But even if you don't, I believe that their current stabilized properties all belong in the suburban group.

 

What if they sold ALL their stabilized properties that are over 75% leased.

 

That would be 57 properties, 6.8M GLA, ~30% not leased with annual NOI ~ 99M.

 

IF they can get 6% cap on that portfolio (which I think, would also a pretty good deal for the buyer), you're looking at 1.65B.

 

Then you pay back the loan, get something more flexible and start focusing on the premier and JV properties that are the real crown jewels of this company.

 

I'm expecting ~ 95M operating cash burn a year with ~62M of NOI. If their 3 premier properties play out over the next year, we should get pretty close to covering operations and finally being able to focus on the high value premier mixed use assets. Another 3-5 years later and you might have their first phase residential done (I don't think they broke ground yet)

 

The challenge with the premier mixed-use assets is that they all require a lot of time to iron out the details and get approval with municipalities. From one of the premier that I found, it's been 3 years and they're still not done. Heck, Esplanade at Aventura was talked about back in the Sears days (back in 2014 according to this article: https://www.nancyonnorwalk.com/sears-looking-at-a-new-twist-in-malls-starting-in-florida/)

 

And once they do get the permits, I expect another 2.5-4 years for development (maybe it'd be faster if they didn't put their contractors in a bad position) and another 1.5-2 years to stabilize.

 

In the meantime, they can continue working on their other 79 suburbans and sell their 25 smaller assets along the way for funding.

 

This can be a multibagger. But it's going to take a heck lot longer than pre covid.

---

 

All in all, I cannot see how SRG can escape its very expensive time death spiral. So best get rid of the issue altogether. The fact that the property it'd be selling is more or less fully valued means we're not really giving up too much upside.

 

Note: this is really the first time I've done an analysis like this. Please point out all poor assumptions or issues with my thought process. Definitely want to learn where my gap in the analysis is. (Of course, I don't know if BRK would be very happy if it was just paid back).

 

Note 2: I'm long SRG

[thepupil]

Note: this is really the first time I've done an analysis like this. Please point out all poor assumptions or issues with my thought process. Definitely want to learn where my gap in the analysis is. (Of course, I don't know if BRK would be very happy if it was just paid back).

 

my suggestion is to spend 1/4 of the time on JBGS and see how the prospective return and risk compares, when you factor in JBGS's development pipeline. It doesn't have to be JBGS, but just take a look at a REIT that has cash flow/a good balance sheet, etc. and do the same forward thinking "what might this look like in 5 years" type of analysis that SRG longs do, and compare that to the "what does this look like now" and compare the difficulty of going from "here" to "5 years".

 

other feedback would be to try to pencil out the prospective NOI on the premier assets (which are Aventura, Santa Monica / Mark 302, Santa Monica UTC, what else?). this is my biggest beef w/ SRG longs is there are presumably only a small number of premier properties that are where all the value is, but there's not much quantification (just very broad strokes) of what those might be worth. not looking for a super detailed underwriting, but I think to own the stock, you should have an idea whether those are $200mm, $500mm, or $2B (you may already, just saying i haven't seen that done by anyone).

[kaioji]

Note: this is really the first time I've done an analysis like this. Please point out all poor assumptions or issues with my thought process. Definitely want to learn where my gap in the analysis is. (Of course, I don't know if BRK would be very happy if it was just paid back).

 

my suggestion is to spend 1/4 of the time on JBGS and see how the prospective return and risk compares, when you factor in JBGS's development pipeline. It doesn't have to be JBGS, but just take a look at a REIT that has cash flow/a good balance sheet, etc. and do the same forward thinking "what might this look like in 5 years" type of analysis that SRG longs do, and compare that to the "what does this look like now" and compare the difficulty of going from "here" to "5 years".

 

other feedback would be to try to pencil out the prospective NOI on the premier assets (which are Aventura, Santa Monica / Mark 302, Santa Monica UTC, what else?). this is my biggest beef w/ SRG longs is there are presumably only a small number of premier properties that are where all the value is, but there's not much quantification (just very broad strokes) of what those might be worth. not looking for a super detailed underwriting, but I think to own the stock, you should have an idea whether those are $200mm, $500mm, or $2B (you may already, just saying i haven't seen that done by anyone).

 

Thanks for the feedback. I've gone slightly deeper on a different REIT before but it felt much more traditional (use 1031 + debt + OP + preferred + common to grow AFFO) but I haven't read up on another development play like SRG. Haven't heard of JBGS. I'll check it out and see what new insights I can add to this thesis.

 

RE primer - I've found 12 of these potential premier mixed-use properties (not including the ones explicitly mentioned). Haven't actually done any calculations about future NOI on them as I feel like their current situation is what's going to prevent them from actually working on these projects (or worse, sell it like they did Chicago only to be in the exact same situation).

 

Looking forward to the homework and will report back on anything that might be material  ;)

[RadMan24]

I don't know any SRG long that is only 5 years analysis. Perhaps sharpen the pencil out to 10+

 

The beef with the shorts is they don't have any idea what kind of value densification adds to the portfolio. Few if any of the former Sear/Kmart properties, as they stand today, many of which are vacant, have to return as retail boxes.

 

 

[thepupil]

I don't know any SRG long that is only 5 years analysis. Perhaps sharpen the pencil out to 10+

 

The beef with the shorts is they don't have any idea what kind of value densification adds to the portfolio. Few if any of the former Sear/Kmart properties, as they stand today, many of which are vacant, have to return as retail boxes.

 

to be clear, I'm not short SRG, nor would i ever short something so levered, with such high short interest, with lots of optionality.

 

In other news HHC/Seritage development deal hot off the presses. <--this would be an example of what looks to be a big asset that I was not previously aware. I can't quite figure out SRG's ownership therein, but still looks like some good news for SRG.

 

Alexandria has struck a mammoth deal for the redevelopment of the old Landmark Mall into a mixed-use community anchored by a relocated Inova Alexandria Hospital campus.

 

The city announced Tuesday that Inova Health System will build a $1 billion hospital on the Landmark site as part of a long-desired overhaul of the mall into 4 million square feet of new development. Developer Foulger-Pratt is now on board to lead the construction alongside mall owner the Howard Hughes Corp. (NYSE: HHC) and Seritage Growth Properties (NYSE: SRG), a REIT spun out of Sears Holdings Co. which owns the old Sears department store on the 52-acre site.

 

Plans for the project include “residential, retail, commercial and entertainment offerings integrated into a cohesive neighborhood with a central plaza, a network of parks and public spaces, and a transit hub,” according to a press release. But the key is Inova’s participation, adding an anchor tenant for a project that the city has worked for years to get moving. Construction could begin as soon as 2023, with the delivery of the first buildings coming two years later.

 

"We intend on developing this in a way that’s a long-term benefit to the community for decades to come," Foulger-Pratt Chief Operating Officer Brigg Bunker said in an interview. "This is one of the last few large-scale developments in Alexandria that can be transformative along the I-395 corridor."

 

A rendering shows a new proposal for a new hospital campus at the old Landmark Mall.

Enlarge

A rendering shows a new proposal for a new hospital campus at the old Landmark Mall.

INOVA HEALTH SYSTEM

 

Inova has been in discussions about some sort of presence at Landmark since at least 2018, as the Washington Business Journal first reported at the time, and recently suggested it was considering a full relocation of its aging Alexandria hospital. The Landmark facility would include a larger emergency room than the current hospital, private patient rooms, an expansion of the Schar Cancer Institute and “one of only three Level II trauma centers in Northern Virginia,” the release said. A medical office building also looks to be part of the plans.

 

 

The companies have yet to release many details about the rest of the development, except to say it will likely include affordable and workforce housing, and perhaps a new fire station as well.

 

Under the terms of this preliminary agreement, the city would issue $54 million in bonds to buy a portion of the site to use as the new hospital campus, then lease it to Inova. Alexandria will also issue another $76 million in bonds for infrastructure work on site and along the adjacent Duke and Van Dorn street corridors.

 

City officials have long discussed the Landmark site's revitalization, with planning efforts stretching back the better part of two decades. However, the array of owners on the property has long been a holdup; Howard Hughes was only able to take full control of the site in 2018 through a partnership with Seritage. The city has approved two different development plans for the property, one in 2013 and one in 2015, but the lack of both an anchor tenant and a deal for public financing assistance proved additional stumbling blocks, even as the bulk of the mall's stores closed in 2017.

 

Officials crafted a new plan guiding development basics at the site last year, but the development team will still need to submit specific plans for review by the City Council, with public hearings beginning as soon as summer 2021.

 

As for the existing Inova Alexandria campus on Seminary Road, that site will be rezoned to "permit a variety of residential uses, to facilitate the sale of the property in advance of the relocation to the Landmark site," per the release. The proceeds will help Inova finance its construction of the new hospital, though the old facility will remain operational until the new one opens.

 

RELATED

 

 

[WneverLOSE]

I can't find any reference to ownership of this asset anywhere (10-K's, 10-Q's, website list of properties, google), the annual reports don't mention any joint venture with HHC or even mention them so I don't understand where those assets are hiding, not on the property list, not part of a joint venture.

 

Is this even legal ? stealing assets is very easy if no one knows they even exist...  ???

 

 

[peridotcapital]

I can't find any reference to ownership of this asset anywhere (10-K's, 10-Q's, website list of properties, google), the annual reports don't mention any joint venture with HHC or even mention them so I don't understand where those assets are hiding, not on the property list, not part of a joint venture.

 

Is this even legal ? stealing assets is very easy if no one knows they even exist...  ???

 

HHC owned Landmark Mall except for the Macy's and Sears boxes. They acquired the Macy's box a while back, but Seritage kept the Sears box. There is no official joint venture, but obviously SRG owns about 1/3 of the acreage. Given their limited liquidity, it seems that the most likely outcome here would be for SRG to sell the land to someone who will build on it, or contribute it to a future JV that will develop it and share the cost. It all depends what the final design plan looks like and what is slated to be built on the SRG acreage.

[peridotcapital]

I can't find any reference to ownership of this asset anywhere (10-K's, 10-Q's, website list of properties, google), the annual reports don't mention any joint venture with HHC or even mention them so I don't understand where those assets are hiding, not on the property list, not part of a joint venture.

 

Is this even legal ? stealing assets is very easy if no one knows they even exist...  ???

 

HHC owned Landmark Mall except for the Macy's and Sears boxes. They acquired the Macy's box a while back, but Seritage kept the Sears box. There is no official joint venture, but obviously SRG owns about 1/3 of the acreage. Given their limited liquidity, it seems that the most likely outcome here would be for SRG to sell the land to someone who will build on it, or contribute it to a future JV that will develop it and share the cost. It all depends what the final design plan looks like and what is slated to be built on the SRG acreage.

 

Also, for perspective HHC paid ~$2M/acre for the Macy's box in 2017. Assuming a similar price, the Sears land is worth about $35M (carrying value at year-end 2019 was ~$6M).

[thepupil]

I can't find any reference to ownership of this asset anywhere (10-K's, 10-Q's, website list of properties, google), the annual reports don't mention any joint venture with HHC or even mention them so I don't understand where those assets are hiding, not on the property list, not part of a joint venture.

 

Is this even legal ? stealing assets is very easy if no one knows they even exist...  ???

 

Easy there bro, no one is stealing the 18 acres in Alexandria.

 

Page 21 supplemental, 18 acres in Alexandria, also F-42 of the 10-K "Landmark Mall"

 

https://www.bamsec.com/filing/156459020008210?cik=1628063

 

http://s23.q4cdn.com/949579163/files/doc_financials/2020/q3/SRG-Q3-2020-Supplemental_vF.pdf

 

 

 

[thepupil]

also, this is a beautiful street view. there's a sign on the dead mall "Mall shops closed, Sears open" and then a bunch of Amazon Prime trucks in the parking lot (the lot is used as extra space for Amazon prime trucks now, the macy's is a homeless shelter).

 

if you're into dead retail porn, can't get much better than that. in 5 years, dead office porn will be abound.

 

but now it's going to be a hospital and stuff, so that's great for all involved.

 

https://www.google.com/maps/place/5901+Duke+St,+Alexandria,+VA+22304/@38.815379,-77.1311263,3a,75y,348.41h,76.02t/data=!3m6!1e1!3m4!1stRsOos3t2rLrhl-Qa9UAdQ!2e0!7i16384!8i8192!4m5!3m4!1s0x89b7b3b315929e0d:0xcb0a0a0651f318d2!8m2!3d38.8156519!4d-77.1329596

 

https://www.businessinsider.com/macys-store-turned-homeless-shelter-phoos-2018-9

[WneverLOSE]

I can't find any reference to ownership of this asset anywhere (10-K's, 10-Q's, website list of properties, google), the annual reports don't mention any joint venture with HHC or even mention them so I don't understand where those assets are hiding, not on the property list, not part of a joint venture.

 

Is this even legal ? stealing assets is very easy if no one knows they even exist...  ???

 

Easy there bro, no one is stealing the 18 acres in Alexandria.

 

Page 21 supplemental, 18 acres in Alexandria, also F-42 of the 10-K "Landmark Mall"

 

https://www.bamsec.com/filing/156459020008210?cik=1628063

 

http://s23.q4cdn.com/949579163/files/doc_financials/2020/q3/SRG-Q3-2020-Supplemental_vF.pdf

 

I wasn't impaling SRG was stealing assets (if they were you wouldn't see it on press release and we would never hear about it) but I just asked if it is legal to not listed major assets since it can lead to very bad behavior. 

 

I now see I mixed up the state and that is why I couldn't find it, thanks for the correction and the information about the development.

[shamelesscloner]

Phil Town is dumping shares of SRG according to latest FB live Q&A, for all you Rule One fans ;)

https://fb.watch/31C3cbcnay/ (SRG bit starts at 34:15)

 

While most here appear to be postulating that Schall left for a better compensation package, Town thinks he may have been removed by Berkshire.

[scorpioncapital]

So if Berkshire kicks out Schall wouldn't that be a positive and cause to increase holding not dump it?

[Salil1983]

Agree - Town is speculating.  And if it were true, it means Berkshire is backing up the truck. I'm pretty sure the CEO announcement will reprice the company - like it always does.  And, SRG is a EV per square feet play - the CEO is only an execution guy.  Should not change the investment thesis.  If Phil bought the shares because of Schall - then he should follow him into the shares of Schall's new company.

[michitche95]

If I am not wrong, yesterday Guy Spier spoke about SRG at MOI Global best ideas 2021. Does anyone have a replay of it? might give some more insights..