SRG - Seritage Growth Properties

[thepupil]

rr interest & G&A: $156mm

In place Rent: $93mm

in place NOI: $40mm annualized

Pro-forma Rent: $126mm

2 years til the Berkshire note is due. July 2023 is not that far away and the Berkshire note is at a 2.5% debt yield. Obviously there's land / developments coming online, but the point is there's nowhere near enough NOI for a traditional RE lender to take care of the Berkshire note. 

I think anyone w/ size in SRG should ask themselves how they'd feel if a PR came out and said that Cerberus or Blackstone or Brookfield/Oaktree bought Berkshire's note. I don't think Omaha will do that to SRG just yet, but that's how you'll impair yourself even if NAV is > stock price w/ all the land/future development. Berkshire does not have a real estate lending franchise to protect and owes a duty to its policyholders/shareholders to protect itself. 

Escape velocity still needs more time be achieved and they have a 26 month shot clock to maturity. 

whether it be at $4 or $40, I feel like I might eventually buy into SRG...but not yet. 

Edited April 30, 2021 by thepupil

[RetroRanger]

@thepupilyour points are all valid, but i am a shameless cloner on this, and bought around 9$, so i feel pretty "safe" in terms of vola/drawdowns.. 

Like Pabrai says, it all comes down to the development of 1-2 prime properties . If that will work out, the NOI will be more than enough. I could totally see SRG selling more and more assets till their portfolio has only 50-60 assets left. 

 

If Pabrai / Spier makes a move, so i will recheck my position. But ATM its about holding or increasing ( if we see 12$ dollar prices again ).

It could totally end in "dead capital" if the trigger is pulled, but i have still confidence since buffet is ( with now less than 5% , due to the dilution ) still in there. Its a pity we cannot track his move anymore  

But thats the game with "minor downside, big upside"

 

Edited April 30, 2021 by RetroRanger

[Pistachio_Lawyer]

47 minutes ago, thepupil said:

rr interest & G&A: $156mm

In place Rent: $93mm

in place NOI: $40mm annualized

Pro-forma Rent: $126mm

2 years til the Berkshire note is due. July 2023 is not that far away and the Berkshire note is at a 2.5% debt yield. Obviously there's land / developments coming online, but the point is there's nowhere near enough NOI for a traditional RE lender to take care of the Berkshire note. 

I think anyone w/ size in SRG should ask themselves how they'd feel if a PR came out and said that Cerberus or Blackstone or Brookfield/Oaktree bought Berkshire's note. I don't think Omaha will do that to SRG just yet, but that's how you'll impair yourself even if NAV is > stock price w/ all the land/future development. Berkshire does not have a real estate lending franchise to protect and owes a duty to its policyholders/shareholders to protect itself. 

Escape velocity still needs more time be achieved and they have a 26 month shot clock to maturity. 

whether it be at $4 or $40, I feel like I might eventually buy into SRG...but not yet. 

Somebody noted the rosy language re terminations and I agree. Management would be wise to refrain from that sort of language.
 
However, now would be a good time to make a conservative bet on SRG.  They sold additional leases during the third wave,  and are spending big money on future improvements. I would watch the cash they spend on improvements very closely as it could signal potential slow down in the business. 

Overall, I may be dead wrong, but I think given the abysmal business conditions faced by many commercial lessors , SRG is doing an acceptable job in surviving to see another day. This time next year, SRG could be back to its pre-pandemic levels.

P.S., I bought my shares at around $14 and back in Fall 2020

[realassetsvalue]

1 hour ago, RetroRanger said:

Like Pabrai says, it all comes down to the development of 1-2 prime properties . If that will work out, the NOI will be more than enough. I could totally see SRG selling more and more assets till their portfolio has only 50-60 assets left. 

A number of folk on this board (and elsewhere) have done some work on the more significant projects that we have some insight into and I have heard this refrain a lot - that just a couple of their major projects will be worth the value of the current business - but which 1-2 projects does anyone think will generate something like $200 million of NOI (to get to $240m of NOI, which would be ~$80m of cash flow after G&A and current interest expense, call it an 8% cash flow yield on the current $1bn market cap) in the next couple years? Dallas? Redmond? Hicksville?

None of my back of the envelope math has gotten close to that figure on the big projects. To be fair, we don't know that much about them, so there could be potential I am missing, but has anyone quantified it?

[Pistachio_Lawyer]

Here is a bear’s view with in-depth commentary and details:

https://seekingalpha.com/article/4422946-seritage-position-continues-to-deteriorate

[Mikekryan]

Seems like they are kicking off development activities which is crucial for the future success. What about money coming in - do you think this will move the dial much? And  what are your thoughts on rent per foot of  $33.59? 
 

Also was it confirmed Buffett is still a shareholder?

 

Thanks guys

[RetroRanger]

49 minutes ago, Pistachio_Lawyer said:

Here is a bear’s view with in-depth commentary and details:

https://seekingalpha.com/article/4422946-seritage-position-continues-to-deteriorate

He is posting this every quarter. He does not want to see what SRG ist about. 

"Will be a guaranteed Zero".. sure totally guaranteed. The Land alone around their properties ( parking lot etc ) is worth 13-14$ a share.

Even Phil Town shared that ! 

[thepupil]

In comparing the 3/2021 supplemental to the 12/2020, I can't find a single property that is more % leased this Q than last. 

The JV's are the easiest to quickly eyeball and UTC LaJolla went from 58% to 37% and the rest seem flattish. Aventura hasn't made any progress. Mark 302 still 0% (but can easily go to 100% w/ the stroke of a pen),

when I google news the promised land ones (Redmond, Dallas, etc), there just doesn't seem to be a lot going on, at least that's in the public domain. No news of construction loans to build out the projects or anything beyond vague "they broke ground".

I recognize that it's covid, but there's plenty of development, lending, leasing going on out there in the world at other stocks I follow. 

Does anyone see any evidence of progress at any sites in these results? (or in other gleaned news).

 

 

 

 

[Gregmal]

^ Thats kind of the gist of things IMO. Why even bother here? Whatever your prospects are, there's other things out there with the same or better prospects carrying much less risk. Ive kept an eye on some of the asset sales, and they're really not that impressive, all around. Look at the Four Corners sales for example. They're selling mediocre to average retail parcels at 7 caps...If you want that kind of leverage and upside tied to those types of assets why not just buy a slightly ITM money call on HHC or SPG? At least then you can really fall back on some trophy assets. Not just the cream of the crop Kohls/Bed Bath in a top notch MSA lol

[peridotcapital]

37 minutes ago, thepupil said:

In comparing the 3/2021 supplemental to the 12/2020, I can't find a single property that is more % leased this Q than last. 

The JV's are the easiest to quickly eyeball and UTC LaJolla went from 58% to 37% and the rest seem flattish. Aventura hasn't made any progress. Mark 302 still 0% (but can easily go to 100% w/ the stroke of a pen),

when I google news the promised land ones (Redmond, Dallas, etc), there just doesn't seem to be a lot going on, at least that's in the public domain. No news of construction loans to build out the projects or anything beyond vague "they broke ground".

I recognize that it's covid, but there's plenty of development, lending, leasing going on out there in the world at other stocks I follow. 

Does anyone see any evidence of progress at any sites in these results? (or in other gleaned news).

 

 

 

 

I was surprised when I drove past the Redmond property in December. Just an abandoned anchor store with a chain link fence around the parking lot. Nothing going on at all... looks like it could have been closed 3 months or 3 years ago... casual bystander would not be able to tell.

Edited April 30, 2021 by peridotcapital

[RetroRanger]

"exactly...they can dwindle down even 185 properties to 10 and still be worth billions. People don´t seem to understand the power of densification. How much is a single NY skyscraper complex worth?"

To Quote someone. 80% may be trash, but SRG Just need 10 really good ones

[Gregmal]

21 hours ago, RetroRanger said:

"exactly...they can dwindle down even 185 properties to 10 and still be worth billions. People don´t seem to understand the power of densification. How much is a single NY skyscraper complex worth?"

To Quote someone. 80% may be trash, but SRG Just need 10 really good ones

 

The thing is though, time is money. If 80% are trash and they just need 10 good ones, why are they wasting so much time/money and fledgling along with the trash? This is the EXACT SAME failed strategy that was used at Sears! "Oh but theyre sitting on gold!"...well, stop sitting and start showing! The flaw in the thesis rests in simple logic. If there was a fortune in a small few, why are those sitting vacant/unworked on while you're developing 7-8 cap Bed Bath anchored stuff? There is really no logic to basically neglecting/hiding your good stuff while you bleed money and executives flee...is the ultimate plan that Lampert, Pabrai, Spier are banking on what? Just one day they lift the vail and ta-da! there's a half dozen $1B projects fully finished that no one knew of that were secretly developed for no cost? None of the thesis here really makes much sense. It hasn't for a while. And the 1/3/5 yr performance is a great indicator of that. 

The whole "hidden/secret" real estate value tends to work in the beginning of the cycle. It tends to lead to misfortune quite often, any time after that. I dont think anything is really "hidden" at this point. Considering everyone from Berkowitz, to Buffett has looked under the hood here. Now you just have a bunch of poor performing fund managers with sunken costs hanging on as their thesis drifts.

Edited May 1, 2021 by Gregmal

[RetroRanger]

https://moiglobal.com/guy-spier-202101/

Just listen to spiers pitch from january ! 

 

 

[Anglozurich]

The AGM/webcast is on the 20th @Gregmal. I suspect you will get some answers to your questions based on the comments in the 10Q (below). Expecting a CEO, who started in March after a pandemic just blew a hole through the entire retail sector, to immediately remedy the situation and lift the curtain on shiny new redeveloped/gold-brick properties...in order to appease short-term investors...is a pretty bizarre expectation. The share price being 60% below pre-COVID levels adequately prices in your concerns. Its not like the market has brushed them off. The investors you mention probably anticipate communication of a redevelopment plan once a review has taken place by new management, and an improving picture over the long term regarding leasing and rates for the better properties and the non-core part gradually being sold and monetised. 

“This quarter marks the beginning of a new chapter at Seritage. After our asset-by-asset review, we’ve taken an important step towards this goal by restructuring our team to better align our human capital and processes. Now we have turned our attention to executing on our asset plans in a thoughtful manner that will preserve our flexible capital structure and maximize our value creation opportunities. We expect to share further detail on these plans once finalized.” said Andrea Olshan, Chief Executive Officer and President.

Edited May 2, 2021 by Anglozurich

[Pistachio_Lawyer]

22 hours ago, Gregmal said:

The thing is though, time is money. If 80% are trash and they just need 10 good ones, why are they wasting so much time/money and fledgling along with the trash? This is the EXACT SAME failed strategy that was used at Sears! "Oh but theyre sitting on gold!"...well, stop sitting and start showing! The flaw in the thesis rests in simple logic. If there was a fortune in a small few, why are those sitting vacant/unworked on while you're developing 7-8 cap Bed Bath anchored stuff? There is really no logic to basically neglecting/hiding your good stuff while you bleed money and executives flee...is the ultimate plan that Lampert, Pabrai, Spier are banking on what? Just one day they lift the vail and ta-da! there's a half dozen $1B projects fully finished that no one knew of that were secretly developed for no cost? None of the thesis here really makes much sense. It hasn't for a while. And the 1/3/5 yr performance is a great indicator of that. 

The whole "hidden/secret" real estate value tends to work in the beginning of the cycle. It tends to lead to misfortune quite often, any time after that. I dont think anything is really "hidden" at this point. Considering everyone from Berkowitz, to Buffett has looked under the hood here. Now you just have a bunch of poor performing fund managers with sunken costs hanging on as their thesis drifts.

SRG could as well be a bet on inflation. I am not saying Spier and Pabrai got into it thinking that, but post-pandemic commercial property values will increase with rising inflation

Edited May 2, 2021 by Pistachio_Lawyer

[Gregmal]

Inflation would be devastating here, given all the construction and development costs still ahead. 

[thepupil]

There are a few common refrains here from the bulls that I think are worth exploring. 

 

1. "getting back to 'pre-covid' levels in price or "discount to pre-covid prices": This  assumes that covid represents a cyclical phenomenon rather than a secular change and assumes that SRG was fairly or undervalued before. Shouldn't we focus on making the case for why SRG is worth more than its $2.6 billion EV? What if SRG was simply egregiously overvalued prior to covid? Prior to covid, SRG was saying they had 84 projects representing a 10-11% unlevered yield on cost opportunity on $1.6B. How much of that has been completed and sold to pay interest? How much of that no longer makes sense? Even if it's all still there, how much value creation will that lead to and what will the stock be worth?

2. the haters are short term, the bulls are long term: the long term is a series of short terms. I've been following St Joe for a decade plus. since before the GFC, JOE has been hyping up the land around its airport. Only in the past few years did they get an agreement to build Margaritaville and only now are they starting to sell lots. One shouldn't have cared about the land around the airport in 2005 or even 2015. Timing matters and understanding whether a project which will presumably create value is going to come to fruition now or in 5 years has material impact to the value of the company. Renderings don't pay rent.

Vornado was talking about its Penn Station redevelopment opportunity since 2006*. They are only now collecting their first rent check from Farley/Facebook and the remainder of the campus is still commodity $60/foot stuff and Penn Station is still full of crackheads. the long term opportunity is there, but we can't just live in the long term. In the long run, we're all dead. when you're burning cash like SRG and have a big maturity in 26 mo's that a conventional bank or RE lender won't touch (or the wide open HY market given negative EBITDA), you can't afford to be super long term.  

3. can't have expected them to have made progress during covid: Vornado leased Farley during covid, JBG Smith built a building fully leased to Amazon during covid, FRPH fully leased up the Maren during covid, Boston Properties signed a 20 year lease w/ Volkswagen during covid, JOE grew lot sales by 100%+ during covid, Cedar signed a 20 year lease / build to suit agreement w/ DC government during covid. Better capitalized and more capable outfits have demonstrated progress on their main initiatives during covid, whereas SRG just has renderings and delayed projects and people suing them as recently as 2 months ago for not doing what they said they would: 

https://www.sun-sentinel.com/community/sawgrass-sun/fl-cn-opinion-seritage-project-update-20210311-zlnf4fdmpnbknaq56hulrpvcuy-story.html.

This is where new management needs to show their plan and prove me (and other haters) wrong. If they have projects that make sense, projects that can get financing, and create value, then there's no reason for them to delay, and there's no reason for them to not be transparent about it. 

4. Guy/Mohnish/Phil/own the common: these people may be great investors. great investors can be right/wrong. 

I know that's a bit ranty and repetitive, but I'm hungover after my first fully vaccinated social gathering and have nothing better to do. 

 

*Vornado 2006 Annual report. Farley/Moynihan didn't happen until 2021. MSG is still there. They are only now tearing down Hotel Pennsylvania. Timing matters. 

"Our pipeline is huge and runs the gamut from the multi-billion dollar Penn Plaza district transformation (Farley/Moynihan Station/Madison Square Garden relocation/Penn Station/ Hotel Pennsylvania)"

 

Edited May 2, 2021 by thepupil

[thepupil]

5. Multibagger upside: I encourage the bulls to think about the math and what that implies. At 3x its market cap, SRG would have an EV of $4.5 billion. That would buy you about 70% of JBGS today (roughly, not precisely adjusting for some things on the JBGS side). JBGS has $300mm of NOI right now and a path to $500mm over the next 5(ish) years. SRG has $40mm annualized NOI and an apparent lack of access to cheap capital (excepting its arguably overvalued stock). How will SRG get to 70% of JBGS?  

3x SRG would buy you 1/3 of FRT's EV. FRT did $550mm of NOI in 2020 in the highest quality mixed use developments in the country. they have $8.5 billion of super high quality retail/mixed use at cost. It takes a lot of time and capital, not just well located dirt, to get to the scale that SRG needs to have "multi bagger upside". they can contribute just land, but then they'll only own a portion. How will SRG get to 30-40% of FRT?

 

 

Edited May 2, 2021 by thepupil

[Mikekryan]

7 hours ago, Anglozurich said:

The AGM/webcast is on the 20th @Gregmal. I suspect you will get some answers to your questions based on the comments in the 10Q (below). Expecting a CEO, who started in March after a pandemic just blew a hole through the entire retail sector, to immediately remedy the situation and lift the curtain on shiny new redeveloped/gold-brick properties...in order to appease short-term investors...is a pretty bizarre expectation. The share price being 60% below pre-COVID levels adequately prices in your concerns. Its not like the market has brushed them off. The investors you mention probably anticipate communication of a redevelopment plan once a review has taken place by new management, and an improving picture over the long term regarding leasing and rates for the better properties and the non-core part gradually being sold and monetised. 

“This quarter marks the beginning of a new chapter at Seritage. After our asset-by-asset review, we’ve taken an important step towards this goal by restructuring our team to better align our human capital and processes. Now we have turned our attention to executing on our asset plans in a thoughtful manner that will preserve our flexible capital structure and maximize our value creation opportunities. We expect to share further detail on these plans once finalized.” said Andrea Olshan, Chief Executive Officer and President.

Is that the 20th May? Have you a link for the webcast? Thanks 

[Gregmal]

2 hours ago, thepupil said:

5. Multibagger upside: I encourage the bulls to think about the math and what that implies. At 3x its market cap, SRG would have an EV of $4.5 billion. That would buy you about 70% of JBGS today (roughly, not precisely adjusting for some things on the JBGS side). JBGS has $300mm of NOI right now and a path to $500mm over the next 5(ish) years. SRG has $40mm annualized NOI and an apparent lack of access to cheap capital (excepting its arguably overvalued stock). How will SRG get to 70% of JBGS?  

3x SRG would buy you 1/3 of FRT's EV. FRT did $550mm of NOI in 2020 in the highest quality mixed use developments in the country. they have $8.5 billion of super high quality retail/mixed use at cost. It takes a lot of time and capital, not just well located dirt, to get to the scale that SRG needs to have "multi bagger upside". they can contribute just land, but then they'll only own a portion. How will SRG get to 30-40% of FRT?

 

 

Or put another way, why wouldnt you just buy JBGS with like 4x leverage? You'd have the same type of upside and still probably less downside, with a much better company.

What no one talks about is how this works? Real estate isnt rocket science. Everyone knows what the ideal picture for the final product looks like. Bringing in a new CEO or whatever won't change that. Although chances are, at this point, the new CEOs won't be better than the previous ones. Every company likes to paint the narrative that the "previous" guys(IE NEOs) were incompetent. But thats rarely true. Usually when something is new and exciting it attracts the best talent. And when its older and stale its doing the opposite. I mean shit, Gregmal, what would you do? Well gee, I'd start with the highest quality retail...grocery anchor....highest psf tenant....Whole Foods....then add some luxury MF, high end dining and shopping. Maybe a hotel and some office. Then splice off some out parcels for ground leases and NNN....the issue here is what does it cost, how long does it take, and where do you get the money? How do you not destroy value in the meantime? No one addresses thing and thats what will be the downfall. Frankly, I dont think Spier, Pabrai, etc know what theyre doing here, and the investment shares similar characteristics to some of their other failed investments. 

[Gregmal]

Yea I just checked and both Pabrai and Spier are long time bag holders who bought into this significantly higher, many years ago. If nothing else, they've already been pretty damn wrong here. The thesis in 2017 was basically the same, but the path to unlocking it was significantly better and outlook much rosier....Heck in 2017 these guys were paying a dividend, even though it wasn't close to being covered, and there was virtually zero reason to do so given the story and expectations of the investor base. That should have been a red flag in and of itself. 

Edited May 2, 2021 by Gregmal

[RetroRanger]

Youre wrong Pabrai cloned Buffet here (he said that in the Book richer wiser happier) in 2016 und sold again in 2017.

He bought back in during the pandemic. 

https://cheaperthanguru.com/portfolio/mohnish-pabrai/SRG/transactions

Also he talks about SRG in the new Podcast "we study billionairs"

 

 

 

 

Edited May 2, 2021 by RetroRanger

[Pistachio_Lawyer]

1 hour ago, Gregmal said:

Yea I just checked and both Pabrai and Spier are long time bag holders who bought into this significantly higher, many years ago. If nothing else, they've already been pretty damn wrong here. The thesis in 2017 was basically the same, but the path to unlocking it was significantly better and outlook much rosier....Heck in 2017 these guys were paying a dividend, even though it wasn't close to being covered, and there was virtually zero reason to do so given the story and expectations of the investor base. That should have been a red flag in and of itself. 

Both Pabrai and Spier bought it during the pandemic and around $14.68 per share.

Last month the stock was hovering around ~$24ish

I appreciate the bear perspective and am following those comments very closely. Thank you for sharing those insights. 

 

[Gregmal]

https://dataroma.com/m/hist/p_hist.php?f=aq

 

So it does look like Pabrai owned it briefly, buying it in low 40s and selling in high 40s, and traded out of it...question(if you care) would be why? If so, this kind of puts a collar around where you'd expect the value range to be, if you are putting faith in Monish(I wouldnt be). Talking about billions in upside and selling for 15-20% seems a bit contradictory, no?

Spier it seems has also traded it, but owned it consistently for years and was a buyer in the 40s many years ago as well. He's definitely a bag holder here. 

So at best, these guys are flipping sardines and avoided long term losses incurred by real shareholders via trading(while talking about this as a long term investment)...

I dont follow either, but given the above, also find it curious that people are of the impression they bought during the crash, as if this reshaped the overall logic behind their involvement. Basically everything under the sun, even total crap has rallied from the covid crash levels. Going forward fundamentals will matter, A LOT. Spier was a SRG buyer at $40s in 2016/7. If he bought more at $14 some years later thats definitely no feather in the cap but rather a sign he's doubling down on whats been a loser. The fact that these guys copy cat each other isnt thesis validating either. 

Edited May 2, 2021 by Gregmal

[Pistachio_Lawyer]

4 hours ago, Gregmal said:

https://dataroma.com/m/hist/p_hist.php?f=aq

 

So it does look like Pabrai owned it briefly, buying it in low 40s and selling in high 40s, and traded out of it...question(if you care) would be why? If so, this kind of puts a collar around where you'd expect the value range to be, if you are putting faith in Monish(I wouldnt be). Talking about billions in upside and selling for 15-20% seems a bit contradictory, no?

Spier it seems has also traded it, but owned it consistently for years and was a buyer in the 40s many years ago as well. He's definitely a bag holder here. 

So at best, these guys are flipping sardines and avoided long term losses incurred by real shareholders via trading(while talking about this as a long term investment)...

I dont follow either, but given the above, also find it curious that people are of the impression they bought during the crash, as if this reshaped the overall logic behind their involvement. Basically everything under the sun, even total crap has rallied from the covid crash levels. Going forward fundamentals will matter, A LOT. Spier was a SRG buyer at $40s in 2016/7. If he bought more at $14 some years later thats definitely no feather in the cap but rather a sign he's doubling down on whats been a loser. The fact that these guys copy cat each other isnt thesis validating either. 

You’re not reading those charts right. Check latest 13F filings or the proper page on dataroma. If you follow those two super investors very closely, you would know that Spier spoke about SRG back in January this year and while giving a talk at MOI Global, and Pabrai spoke about it back in March. Pabrai also mentions SRG in William Green’s Richer, Wiser, Happier which came out this month. I am not saying their investment in SRG automatically makes SRG a great investment, but it’s incorrect to assert they bought it at high price and are already sold out of their respective positions.