SRG - Seritage Growth Properties

[Xerxes]

For those interested M. Pabrai talks about this holding in the new podcast that came this weekend on TIP.

Incidentally, it was a really good podcast.

[Gregmal]

The link I gave is to the history of Spier's ownership. He has been a holder for years and got walloped in Q1 2020. Nothing wrong there, but its not as though he all of a sudden found a new position. Per the filings, the majority of his SRG is badly under water. Maybe he thought Jan '21 was a good time to all of a sudden tout the stock, IDK. Im not a mind reader I just try to connect dots and what I get here is that Pabrai traded it and Spier is a long term bag holder. 

I am not trying to be overly negative, I am just looking for a smoking gun. Where is the element here that the market is missing? Why does the opportunity exist? Believe me, I love these type of situations. But what everyone is looking at is stale and I dont see anything new. Thats all. I would love to be corrected. 

[RetroRanger]

Pabrai tells you the reasons. "If" they manage to beat the tailwinds , Pabrai sees seritage (in 10-20 years) having 30-40 densificated properties in prime regions, those regions where the Blue chips are operating. And those properties will gain value (10x or more).

He stated the property in Dallas as an example. 

He took the approach because of the price and wants to watch the movie for 20 years. 

Also he can see seritage as a "Recycling Reit" . BUT he also said capitalism is brutal , and it could also be destroyed.

And regarding Spier. He is very good in holding stocks. He likes to hold stocks for 20-30-40 years. 

Edited May 3, 2021 by RetroRanger

[Xerxes]

maybe i should have posted the link

Value Investing in 2021 w/ Mohnish Pabrai | The Investor's Podcast 

[realassetsvalue]

Looking at the Dallas project is informative I think. Its a good location in a good market. There is obviously value in the site and certainly more than the original Hilco Dark Value of $27.7 million... But how much more and when can it be unlocked is the question.

Based on what I would consider upside case assumptions, which are attached, I think the project could result in ~$55m of NOI and be worth about $1 billion once completed. That would cost $590m to construct leaving a net value of $410m and if we say it takes 3 years to build at a 10% discount rate thats ~$310m of net value today if all goes smoothly. I've used pre-COVID cap rates on retail and office and looked to be optimistic on rents (pre-COVID or higher), etc. I'm no expert on development in this market so you can change the assumptions if you see fit. For what its worth, 3 years is probably an impossibly fast timeframe to build out this project but lets be positive about it.

I know @thepupil loves a good hype video and they've got a pretty solid one here: https://kdc.com/our-work/park-heritage

Also a live webcam of the site - I say site as current status is demolition is complete but no construction has started: https://app.oxblue.com/open/kdc/parkheritage

For reference, Piedmont REIT bought 1.4m sq ft of office down the street behind the Galleria Mall at $275 PSF and a high 5s cash cap rate in Feb 2020. They claim they purchased at a 40% discount to replacement cost. Included in the deal was 1.9 acres of development land, which was priced at $4m or $2.1m an acre. https://investor.piedmontreit.com/static-files/588cabc8-00c8-48e1-bfa6-5bac6b4589a6

Also worth noting that what SRG is doing here is not unique. The rest of the mall is being redeveloped by Beck Ventures who also plan office, retail and apartments on the site. The projects appear to be separate and would probably complement each other in the long-term but compete in the near-term. http://www.dallasmidtown.com/

Ultimately its a question of whether you think that this project with these numbers is a sure thing (or is too conservative) and Seritage has 20 of them lined up and ready to go, which means that today's enterprise value of $2.5 billion is a significant discount to the net project value of $6 billion (20 * $300m).

My view is development is hard, SRG was (and is) doing a good job, but the difficult hand they were dealt was made much more difficult by COVID as they lost 18 months of time to progress their projects and demand for office and retail has been significantly impacted. I personally wouldn't be comfortable with a top down thesis - that the top 10 sites are worth "billions" and the opportunity here is to "watch the movie unfold" - we can do that last part for free!

 

 

2021-05-03_SRG_HeritageParkDallas.xlsx

[RetroRanger]

Thats why the price is important! I wont feel comfortable either with a buy in of 17-23.

But If you bought the dip (6$). I bought at 9$.

If SRG will slowly dies i got at least a buffer. The bigger loss would be , that the capital was frozen for 3-5 years .

 

 

[thepupil]

realassets, thanks for that, and yes I do appreciate a good hype video, SRG needs more of those!

You probably saw that the dallas project actually has a brochure w/ a timeline and phases. I had not done any underlying work on what might the land value be here, but have been trying to think of a heuristic of "$200mm land value / megasite" take that number * megasites = dream value, so glad to see you're thinking there. I think that's the only way the bull thesis is correct. For there to be a material (10+) amount of "megasites" that can come to fruition quickly. 

https://kdc.com/uploads/team/Park-Heritage-Brochure_Feb2021-v2_210322_141951.pdf

 

 

I know we're beating a dead horse here, but I  think UE's recent results should concern SRG longs. 

Urban Edge has 77 properties, 16mm square feet. In Q1 they leased ~360K sf 

https://s2.q4cdn.com/359927308/files/doc_news/2021/04/Exhibit-99.1-Earnings-Release-1Q21.pdf

Seritage has 158 properties and 26.5mm sf. It's a larger portfolio. They leased 5 leases totaling 44K square feet. 

UE signed 9x the leases as SRG despite SRG having a larger portfolio and UE being located in NYC region (which is totally dying, right?)

1 quarter is just that. 1 quarter. things may change. all this is to say that new mgt has their hands full.  In addition to concerns regarding the pace of development of the non-income producing land/development sites, I think SRG bulls should also be concerned regarding the management and competitive position of the income producing properties. 

I would also note that UE sets forth regular and clear development budgets, expected yields, and the extent that they are pre-leased. In this case they have $121mm of which 80% is pre-leased. 

UE is trading at 85% or so of its pre-covid NAV. I don't recommend buying it hear. That ship has pretty much sailed, but just providing a comp to show SRG's relative underperformance. Could do the same w/ KIM but don't have time/desire.

Quote

Active redevelopment projects consist of $121.1 million of estimated gross costs, of which $81.7 million remains to be funded. These projects are expected to generate an approximate 8% unleveraged yield. As of May 5, 2021, these projects were 80% leased⁽⁵⁾.

The Company has signed leases that have not yet rent commenced aggregating $10 million of gross revenue, representing approximately 5% of NOI.

 

[RetroRanger]

The leases are Important but more important is that they want to convert projects Like Dallas from 235.000 sqf to 2.350.000. Thats a 10x on the assets alone. Now take a conservative price of 22 $ per sqf and yeah you get the numbers! 

Edited May 5, 2021 by RetroRanger

[Pistachio_Lawyer]

5 hours ago, RetroRanger said:

The leases are Important but more important is that they want to convert projects Like Dallas from 235.000 sqf to 2.350.000. Thats a 10x on the assets alone. Now take a conservative price of 22 $ per sqf and yeah you get the numbers! 

True. Nothing would be a buy opportunity if we looked at it during an industry wide event and ponder why the company isn't doing so good. SRG is a decent asset play, and I am hoping to buy more if and ever the stock falls below $14 range.

Edited May 5, 2021 by Pistachio_Lawyer

[Mikekryan]

Some more information about this project. It would be great to see this project move forward at a good pace now. 
 

https://www.dmagazine.com/commercial-real-estate/2020/01/with-a-park-landdesign-says-it-will-transforms-dallas-mall-into-a-community/

[Cicero]

On 5/4/2021 at 1:17 AM, realassetsvalue said:

Looking at the Dallas project is informative I think. Its a good location in a good market. There is obviously value in the site and certainly more than the original Hilco Dark Value of $27.7 million... But how much more and when can it be unlocked is the question.

Based on what I would consider upside case assumptions, which are attached, I think the project could result in ~$55m of NOI and be worth about $1 billion once completed. That would cost $590m to construct leaving a net value of $410m and if we say it takes 3 years to build at a 10% discount rate thats ~$310m of net value today if all goes smoothly. I've used pre-COVID cap rates on retail and office and looked to be optimistic on rents (pre-COVID or higher), etc. I'm no expert on development in this market so you can change the assumptions if you see fit. For what its worth, 3 years is probably an impossibly fast timeframe to build out this project but lets be positive about it.

I know @thepupil loves a good hype video and they've got a pretty solid one here: https://kdc.com/our-work/park-heritage

Also a live webcam of the site - I say site as current status is demolition is complete but no construction has started: https://app.oxblue.com/open/kdc/parkheritage

For reference, Piedmont REIT bought 1.4m sq ft of office down the street behind the Galleria Mall at $275 PSF and a high 5s cash cap rate in Feb 2020. They claim they purchased at a 40% discount to replacement cost. Included in the deal was 1.9 acres of development land, which was priced at $4m or $2.1m an acre. https://investor.piedmontreit.com/static-files/588cabc8-00c8-48e1-bfa6-5bac6b4589a6

Also worth noting that what SRG is doing here is not unique. The rest of the mall is being redeveloped by Beck Ventures who also plan office, retail and apartments on the site. The projects appear to be separate and would probably complement each other in the long-term but compete in the near-term. http://www.dallasmidtown.com/

Ultimately its a question of whether you think that this project with these numbers is a sure thing (or is too conservative) and Seritage has 20 of them lined up and ready to go, which means that today's enterprise value of $2.5 billion is a significant discount to the net project value of $6 billion (20 * $300m).

My view is development is hard, SRG was (and is) doing a good job, but the difficult hand they were dealt was made much more difficult by COVID as they lost 18 months of time to progress their projects and demand for office and retail has been significantly impacted. I personally wouldn't be comfortable with a top down thesis - that the top 10 sites are worth "billions" and the opportunity here is to "watch the movie unfold" - we can do that last part for free!

 

 

2021-05-03_SRG_HeritageParkDallas.xlsx 11.16 kB · 11 downloads

This is very thoughtful. One can obviously debate the assumptions; some look aggressive (timeframe) others quite conservative (construction costs, resi rent looks a bit low and a 55% NOI margin implies a service level that is perhaps not entirely consistent with the rent price point), but I think they look ball park ok. The one objection I have is that the calculation does not account for value of the land seritage contributes. If one believes the assumptions underlying this calculation, the consequence would be that a third party developer - who has to pay something for the land - could not profitably redevelop these sites unless the developer pays only a token amount for the land. Not an intuitive result I think. 

Edited May 12, 2021 by Cicero

[realassetsvalue]

I think that project pro forma (and completely agree I'm not an expert on Dallas development so anyone should feel free to tweak the numbers to reflect what they believe is market) does allow for sufficient profit on cost for a 3rd party developer to pay something for the land.

My thinking would be a $310m PV profit from the project reflects a ~53% profit on the $590m project cost. If a developer is willing to develop this project to a 25% profit on cost, they could pay up to $114m for the land or $5m an acre. If they need a 30% profit on cost, they could pay up to $58m or $2.5m an acre.

That working implies the site is valuable - both figures are higher than the recent comp down the street for a smaller land site of $2.1m an acre. But I clearly think its more complicated than Seritage is going to 100x the density of the site so that will 100x the value.

The long case is there is a handful of sites that valued conservatively reflect today's enterprise value. I'd love to see the working that folks are using to get there on a project by project basis.

If Dallas is worth $300m of net value, which projects get to the remaining $2.2 billion of enterprise value? And what assumptions do you need to believe to get there? I have struggled to find answers to those questions but would love to hear the answers of others.

[Cicero]

Sorry I should have been a bit clearer on the land payment. You make a fair fair point on the potential to pay $58 MM. However, that rests on the assumption of a discount rate of 10%. Getting 10% on relatively short-term retail redevelopments that you can largely pre-lease (i.e. the stuff SRG has been doing thus far) sounds pretty good. But getting 10% for a mixed use greenfield development that will take serval years to complete with limited opportunity to derisk through pre-sales etc sounds not so good to me. Hence my comment on the limited potential to pay for land, based the assumption that a higher discount rate is warranted. 

In a different life I used to work on mixed use developments for a little while. Not in the US and granted interest rate environment was different, but a project like this would have been a pretty quick "no".

[peridotcapital]

1 hour ago, realassetsvalue said:

I think that project pro forma (and completely agree I'm not an expert on Dallas development so anyone should feel free to tweak the numbers to reflect what they believe is market) does allow for sufficient profit on cost for a 3rd party developer to pay something for the land.

My thinking would be a $310m PV profit from the project reflects a ~53% profit on the $590m project cost. If a developer is willing to develop this project to a 25% profit on cost, they could pay up to $114m for the land or $5m an acre. If they need a 30% profit on cost, they could pay up to $58m or $2.5m an acre.

That working implies the site is valuable - both figures are higher than the recent comp down the street for a smaller land site of $2.1m an acre. But I clearly think its more complicated than Seritage is going to 100x the density of the site so that will 100x the value.

The long case is there is a handful of sites that valued conservatively reflect today's enterprise value. I'd love to see the working that folks are using to get there on a project by project basis.

If Dallas is worth $300m of net value, which projects get to the remaining $2.2 billion of enterprise value? And what assumptions do you need to believe to get there? I have struggled to find answers to those questions but would love to hear the answers of others.

Isn't it only worth $300M to SRG if they do the entire project themselves? If they don't go that route (can't imagine they will, or even could), the fact that the total profit potential equates to $5 per SRG share is pretty meaningless, isn't it? And it would also follow that finding 8 mega projects in the SRG portfolio worth $300M each (which gets to you to the current E/V) is also shortsighted when considering the margin of safety on the stock...

What if SRG sells the Dallas land for $75M and rolls that into a 12.5% minority stake in the entire project? Even if the development is worth $1B upon completion, the per-value to SRG is more like $2 per share because they are offloading the bulk of the costs (and hence the upside). 

This is generally why I think it is premature to argue that the entire E/V is covered by 5-10 sites. Sure, if they were to funding everything themselves at a good rate and could build these things out quickly, but that's not how these mixed use projects typically work out. They'll probably JV the hotels, the multi-family, etc. 

[Mikekryan]

What is the risk of privatization like for SRG now? If that were to happen, what would shareholders get from it? 

[thepupil]

3 hours ago, Mikekryan said:

What is the risk of privatization like for SRG now? If that were to happen, what would shareholders get from it? 

I'll potentially look like a dumbass saying this, but I would say the risk of a traditional takeover is close to zero. this isn't a finance-able company and vast majority of market participants need some kind of traditional leverage to make it work. 

I think the risk of some sort of needing a capital infusion that doesn't necessarily favor common stockholders is high. 

 

[RetroRanger]

Market is crazy again Stock price at 23 2 months ago , now at 14 again nothing changed (in the good or bad ).

Under 12 i will buy more SRG again!

Edited May 12, 2021 by RetroRanger

[thepupil]

I talk too much on the SRG board for a dude w/ no position...but if you think SRG is a multibagger the difference between $14 and $12 is nothing in terms of enterprise value...like les than 5%.

This is going to sound condescending , but it does concern me that i see you reference the stock px a lot but not the fully diluted market cap or EV. Why do ya like it at $2.2B but not $2.3B?
 

for something with so wide a range of outcomes there isn’t much difference in risk between a stock px of $20 and $10. 

[RetroRanger]

"This is going to sound condescending , but it does concern me that i see you reference the stock px a lot but not the fully diluted market cap or EV. Why do ya like it at $2.2B but not $2.3B?"

 

I do ? I never noticed. To me it does not matter If the stock is at 14 or 20. I bought into a Business, Not a Stock. I just want to point out another restock chance perhaps incoming. 

But you all probably have 10+ years experience in the stock Market. I dont. I am simply not (yet) used to such a vola ! Thats all

[Gregmal]

I'll just say this in an attempt to be helpful and perhaps save you headache down the line...but...if you "bought into a business" you already made a major mistake. There are businesses, and then there are asset plays. Seritage as a business doesnt work and is in any matter of expression, an utter failure as a business. It has never made profits and its NEOs have been failures who ultimately left or gave up. 

The only basis for an investment here, is as an asset play...not as a business. But even there, you can easily find similar situations at other companies which offer better profiles. 

Can anyone answer this simple question....how does SRG repay its debt? Do you think they refinance with a better or worse rate? Keep in mind they got the current rate when the 10 year was like 100 basis points higher and these sort of assets much more en vague + development costs significantly cheaper. 

[RetroRanger]

"The only basis for an investment here, is as an asset play...not as a business. "

 

No youre pinpointing me on my language , please stop. Of course i know its a Asset Play ! But i am a shameless cloner on this with Spier and Pabrai ! 

As in terms of debt. Everything will be paid by selling properties. That was always SRGs Game. Sell to Finance.

If you are not satisfied with the answer then .

 

 

Edited May 13, 2021 by RetroRanger

[thepupil]

I'm not satisfied with that answer. 

SRG had $9mm of NOI last Q ($8mm including just the consolidated properties). this was on $31mm of rental income, which is in line with the $130mm of annual rent including signed not opened

now that NOI margin seems VERY LOW, so I'm going to assume that actual underlying NOI of the income producing portfolio is much higher and that it's being dragged down by property taxes on non-income producing properties (and just hthat the SNO are not online yet)

Urban Edge reports a 57% NOI margin last Q and a 64% 1 Q 2020. 60% is also about right when looking at CDR. 

So giving full credit for the SNO and backing out the excess expenses, I think the underlying income properties are doing 

$130mm revenue * 60% = $80mm of NOI, optimistically.

they can either sell or (if Warren let's them) take on property level debt. If they sell ALL at a 7 cap and have no more g&A, cash burn, or opex on the remaining land, that's $1.1B of potential proceeds. If they were able to take on 65% LTV debt on the income producing estate that's $700 million. Conventional (CHEAP) lenders would lend about $700 million to SRG's income properties.

they owe Omaha $1.6 billion in 26 months. there's a $500 million - $900 million hole. they have a couple hundred million of cash, some of which they'll burn through over the next 2 years, so make it a $400-$800 million hole between what their income producing assets would get and what they owe Omaha in about 2 years. 

if actual NOI is closer to the $40mm reported, well then we've got much bigger problems; the hole is $1.2 billion (I don't think this is the case). but there's the actual capex for the megaprojects. they could just contribute land (and miss out on a large portion of the alleged value creation), or bring on JV partners, etc. 

this also illustrates the "the market isn't properly valuing the land". I think the market right now @ $14 is valuing the land at about $1.2 billion ($1.5B of net debt + $800mm of equity = $2.3B less $1.1B of 7% cap rate on the normalized income props) . considering the pace of sales, operating losses in the interim, etc. it's not clear to me at all that the land is worth > $1.1 billion of PV.  that's why the bears are all like "so where's the amazing assets" where's are the 10 sites worth $50mm $100mm 200mm each, today? 

do you see how there's a big hole in SRG's sources versus uses of cash?

 if SRG announced a rights offering where they are raising $400mm-$800mm, and you needed to increase your investment in the company by 50-100%, would you be excited to participate?

have you sized it to allow for this?

this is why "they'll sell assets" is an unsatisfying answer. it lack any quantification. and to a certain extent, owning a cash burning retail RE company staring down the barrel of a fat loan maturity that a traditional RE lender wouldn't touch w/ a 10 foot pole, is a quantitative exercise. 

I'm not trying to get more information about SRG at this point and have said enough.

With hindsight we can look back on the post and you can point to this as how short sighted the bear case was, how they leased up a bunch of stuff and came up with a billion of cash and developed their properties into something beautiful and the market just couldn't see it, and you got your multibagger. or i'll snarkily bump this and say something along the lines of "no one could see this coming".

Either way there are better businesses EASIER businesses to own cloning people. I find quoting buffett obnoxious but this is very much a 10 foot hurdle. 

 

 

 

Edited May 13, 2021 by thepupil

[Pistachio_Lawyer]

On 5/13/2021 at 3:46 AM, Gregmal said:

I'll just say this in an attempt to be helpful and perhaps save you headache down the line...but...if you "bought into a business" you already made a major mistake. There are businesses, and then there are asset plays. Seritage as a business doesnt work and is in any matter of expression, an utter failure as a business. It has never made profits and its NEOs have been failures who ultimately left or gave up. 

The only basis for an investment here, is as an asset play...not as a business. But even there, you can easily find similar situations at other companies which offer better profiles. 

Can anyone answer this simple question....how does SRG repay its debt? Do you think they refinance with a better or worse rate? Keep in mind they got the current rate when the 10 year was like 100 basis points higher and these sort of assets much more en vague + development costs significantly cheaper. 

Should also consider the possibility that SRG may take on more assets in the future and morph into an asset turn around business

[Anglozurich]

@thepupil you seem to be frustrated that because this is not your one foot hurdle, it therefore has to be a 10 foot hurdle for everyone. Someone who has visited most of the gold brick properties / land parcels may have an acute understanding of the redevelopment potential and leasing rates in those real estate micro-climates. They may just have an edge on you or they may not. This thread seems to go around in circles. If anyone has anything to add on the potential of individual assets (like Dallas post above - helpful thanks) would be happy to engage.

Edited May 15, 2021 by Anglozurich

[Ismael]

@thepupil thanks for your constructive criticism on the srg financing issues.  Much appreciated.