SRG - Seritage Growth Properties

[CorpRaider]

Man, is English his first language?  In first three sentences we have: Sears "needs to sale the stores..."; and "Although we are not typically akin to shorting..."

 

He also has many references to some Lambert gentleman.

[alpha asset strategies]

He's saying that he thinks SHLD will vacate 7mm sq ft and put the properties back to SRG *next month*. If you operate under that assumption then of course they'll face a funding gap.  But that's an extreme assumption and I'm not sure it's based in reality.

 

 

This is a good point that I hadn't considered.  SHLD announced in April, 2016 that they would be closing 78 more stores this summer - 68 Kmarts & 10 Sears locations.  In order to vacate 7mm sq ft and put the properties back to SRG this summer, that would imply that the large majority of the announced store closures would be SRG properties - which seems highly unlikely.

 

I now see your point with regard to some of the assumptions that Brad Thomas was using.  It appears that he was analyzing the company under almost a "worst case" scenario, which probably has a low probability of actually coming to fruition.

[thinkpad]

Hello

If I remember correctly a list of the stores to be closed was given earlier this year. I can not find it again but I remember I checked each of these stores and no one belongs to SRG.

 

Edit: here is the list http://fortune.com/2016/04/22/sears-kmart-stores-close-where/

[shhughes1116]

He doesn't have a very strong background. IMO he's exceedingly average and has no real specialized knowledge in the space. So take that for what it's worth.

 

Your comment is a bit unfair.  If you have been following his articles, as you indicated in your message, you'd know that his background is in commercial real estate and more specifically in commercial real estate development.  So yes, I would argue that he does have some specialized knowledge in the space.  Are his articles a bit superficial?  Yes, but I would make the same argument about some of the analysis on this message board.  Take a look at the NXRT thread...I dinged someone for exactly this point.  When it comes to real estate, I believe you need to be willing to look under the hood (i.e. on an individual property basis) in order to be successful on a consistent basis.  However, people generally don't share that type of granular information/analysis for free, hence why you get the superficial stuff on Seeking Alpha.  You get what you pay for...       

[glorysk87]

Your comment is a bit unfair.  If you have been following his articles, as you indicated in your message, you'd know that his background is in commercial real estate and more specifically in commercial real estate development.  So yes, I would argue that he does have some specialized knowledge in the space.  Are his articles a bit superficial?  Yes, but I would make the same argument about some of the analysis on this message board.  Take a look at the NXRT thread...I dinged someone for exactly this point.  When it comes to real estate, I believe you need to be willing to look under the hood (i.e. on an individual property basis) in order to be successful on a consistent basis.  However, people generally don't share that type of granular information/analysis for free, hence why you get the superficial stuff on Seeking Alpha.  You get what you pay for...       

 

Agree to disagree. Experience in real estate development is just that. It doesn't necessarily translate very well into valuing a security.  A company could have the best properties in the world or the worst properties in the world - I'm sure Brad would be able to determine that very well. But the price you pay for the company that owns those properties is the most important factor in the decision to invest in that company. And that's where I think Brad falls way way way short.  If you read his articles, almost all of the analysis and valuation is simply parroted back from either the company's investor presentation or from third-party research.  His own personal analysis doesn't get too far past P/FFO and Dividend Yields.

[Picasso]

Your comment is a bit unfair.  If you have been following his articles, as you indicated in your message, you'd know that his background is in commercial real estate and more specifically in commercial real estate development.  So yes, I would argue that he does have some specialized knowledge in the space.  Are his articles a bit superficial?  Yes, but I would make the same argument about some of the analysis on this message board.  Take a look at the NXRT thread...I dinged someone for exactly this point.  When it comes to real estate, I believe you need to be willing to look under the hood (i.e. on an individual property basis) in order to be successful on a consistent basis.  However, people generally don't share that type of granular information/analysis for free, hence why you get the superficial stuff on Seeking Alpha.  You get what you pay for...       

 

Agree to disagree. Experience in real estate development is just that. It doesn't necessarily translate very well into valuing a security.  A company could have the best properties in the world or the worst properties in the world - I'm sure Brad would be able to determine that very well. But the price you pay for the company that owns those properties is the most important factor in the decision to invest in that company. And that's where I think Brad falls way way way short.  If you read his articles, almost all of the analysis and valuation is simply parroted back from either the company's investor presentation or from third-party research.  His own personal analysis doesn't get too far past P/FFO and Dividend Yields.

 

+1.  His articles are just a copy/paste job from company presentations. 

[rogermunibond]

http://www.wsj.com/articles/mall-owners-push-out-department-stores-1468202754

 

Nice WSJ piece on malls repurposing department store space.

[buylowersellhigh]

 

10-Q:

 

http://archive.fast-edgar.com//20160805/A22BE22IZZ2RMJZ222Z62ZXKCE6GZZ22N286/

[scorpioncapital]

Just wondering how do people value SRG? I get the conversion of real estate. I estimate if all the property is converted we could see base rents of perhaps $300-$350m in 4-5 years. How would one think about the mortgage rate and valuation for this income stream for a REIT? There are 57m shares out and debt is about 1 billion. So the current value (@ $48/share) is $2.7 billion equity + $1 billion debt. If all goes according to plan this would be a P/E of around 8-9x and a return of maybe 11-12% on your investment. Since this is the minimum return I'd like to get, is there a reason this would be worth more than ~$50/share to get that return in a few years? Obviously if rates stay at very low levels the market might value it more and if rates go back to somewhat more normal, it would be dangerous to overpay. But neither of these considerations change the return that an initial investor would demand on purchase price. Is real estate somehow valued at higher multiples - like a utility - due to being safer?

 

 

[glorysk87]

Just wondering how do people value SRG? I get the conversion of real estate. I estimate if all the property is converted we could see base rents of perhaps $300-$350m in 4-5 years. How would one think about the mortgage rate and valuation for this income stream for a REIT? There are 57m shares out and debt is about 1 billion. So the current value (@ $48/share) is $2.7 billion equity + $1 billion debt. If all goes according to plan this would be a P/E of around 8-9x and a return of maybe 11-12% on your investment. Since this is the minimum return I'd like to get, is there a reason this would be worth more than ~$50/share to get that return in a few years? Obviously if rates stay at very low levels the market might value it more and if rates go back to somewhat more normal, it would be dangerous to overpay. But neither of these considerations change the return that an initial investor would demand on purchase price. Is real estate somehow valued at higher multiples - like a utility - due to being safer?

 

Base rent of $300-$350mm seems way way too low for me.  If you assume $14/sq ft in rent on redeveloped properties that gets you to $552mm, and there's likely upside to that number down the road.

 

When I did my analysis (both NAV and FFO analyses) I calculated an intrinsic value of about $60-$65 2 years down the road.  Upside past that is much higher as the properties continue to be redeveloped.

 

My analysis also concluded that it will take 2-3 years for SRG to diversify their portfolio enough away from Sear's to be safe.  I have long dated puts on Sears as a hedge through that time frame. Past that, it should be able to survive even if Sears disappears off the Earth.

[FCharlie]

 

 

Base rent of $300-$350mm seems way way too low for me.  If you assume $14/sq ft in rent on redeveloped properties that gets you to $552mm, and there's likely upside to that number down the road.

 

When I did my analysis (both NAV and FFO analyses) I calculated an intrinsic value of about $60-$65 2 years down the road.  Upside past that is much higher as the properties continue to be redeveloped.

 

My analysis also concluded that it will take 2-3 years for SRG to diversify their portfolio enough away from Sear's to be safe.  I have long dated puts on Sears as a hedge through that time frame. Past that, it should be able to survive even if Sears disappears off the Earth.

 

The big question for me is:

 

Beyond restricted cash, how will Seritage fund the renovations required to bring the rent up? Will they issue shares? Will they borrow? It's easy to see this stock being very valuable, but that's assuming they don't issue millions of shares to fund the redevelopment of stores.

 

 

[SlowAppreciation]

This might be a stupid question, but what is the top line # in the VIC valuation representative of? It increases along with increases in $/sqft, so is it some revenue multiple or something like that? 

[glorysk87]

This might be a stupid question, but what is the top line # in the VIC valuation representative of? It increases along with increases in $/sqft, so is it some revenue multiple or something like that?

 

Looks like he's calculating an NAV based off rent psf.

[scorpioncapital]

Looks like he's linking the total market capitalization of shares + operating partnership units from page 4 of the supplement that would result from the completion of redevelopment at various base rents for the entire portfolio.

[glorysk87]

Looks like he's linking the total market capitalization of shares + operating partnership units from page 4 of the supplement that would result from the completion of redevelopment at various base rents for the entire portfolio.

 

I'm not following you here.

[scorpioncapital]

I looked at it again but I'm not entirely sure how he's discounting rent per square foot to gross asset value. If you divide the net investment in real estate on the b/s by total gross square feet it comes out to about 10x the rent per square foot.

[SlowAppreciation]

I looked at it again but I'm not entirely sure how he's discounting rent per square foot to gross asset value. If you divide the net investment in real estate on the b/s by total gross square feet it comes out to about 10x the rent per square foot.

 

It seems like an odd detail to leave out considering it's the biggest piece of his valuation?

[SlowAppreciation]

Looks like he's linking the total market capitalization of shares + operating partnership units from page 4 of the supplement that would result from the completion of redevelopment at various base rents for the entire portfolio.

 

But how do you go from base rate to market cap? Market cap should reflect an increase in earnings/asset value, not the other way around. 

[SlowAppreciation]

Just wondering how do people value SRG? I get the conversion of real estate. I estimate if all the property is converted we could see base rents of perhaps $300-$350m in 4-5 years. How would one think about the mortgage rate and valuation for this income stream for a REIT? There are 57m shares out and debt is about 1 billion. So the current value (@ $48/share) is $2.7 billion equity + $1 billion debt. If all goes according to plan this would be a P/E of around 8-9x and a return of maybe 11-12% on your investment. Since this is the minimum return I'd like to get, is there a reason this would be worth more than ~$50/share to get that return in a few years? Obviously if rates stay at very low levels the market might value it more and if rates go back to somewhat more normal, it would be dangerous to overpay. But neither of these considerations change the return that an initial investor would demand on purchase price. Is real estate somehow valued at higher multiples - like a utility - due to being safer?

 

Base rent of $300-$350mm seems way way too low for me.  If you assume $14/sq ft in rent on redeveloped properties that gets you to $552mm, and there's likely upside to that number down the road.

 

When I did my analysis (both NAV and FFO analyses) I calculated an intrinsic value of about $60-$65 2 years down the road.  Upside past that is much higher as the properties continue to be redeveloped.

 

My analysis also concluded that it will take 2-3 years for SRG to diversify their portfolio enough away from Sear's to be safe.  I have long dated puts on Sears as a hedge through that time frame. Past that, it should be able to survive even if Sears disappears off the Earth.

 

So is your top line estimate just "total sq ft * avg annual rent per sq/ft"? And then you back out costs/expenses to get to your AFFO?

 

This is my first time valuing a REIT/Real estate so I know that the valuation models tend to be a little bit different.

[glorysk87]

As I said, I'm pretty sure he's calculating NAV.  He doesn't write out the actual calculation there, but he's using some assumptions to get from rent psf to NAV. The actual calculation is relatively simple.  Rent psf > rental revenue - operating expenses = NOI / Cap Rate = Real estate value.  Then he subtracts the liabilities to get NAV.

 

I could be wrong, but I'm pretty sure that's what he's doing.

[SlowAppreciation]

As I said, I'm pretty sure he's calculating NAV.  He doesn't write out the actual calculation there, but he's using some assumptions to get from rent psf to NAV. The actual calculation is relatively simple.  Rent psf > rental revenue - operating expenses = NOI / Cap Rate = Real estate value.  Then he subtracts the liabilities to get NAV.

 

I could be wrong, but I'm pretty sure that's what he's doing.

 

Sorry, I should have been more clear. I meant what are you doing for your valuation? I've seen DCFs, NAV, FFO, and AFFO for SRG and since I don't have a ton of experience analyzing REITs, just wanted to be sure I was looking at it the right way.

 

[glorysk87]

Ohh.

 

I have two valuations, one based on NAV and one based on FFO.  For both I have a "downside" scenario, which calculates the valuation if Sears were to go bankrupt and immediately vacate all the properties (ie. pay no rent past the day of declaring bankruptcy).

[SlowAppreciation]

Ohh.

 

I have two valuations, one based on NAV and one based on FFO.  For both I have a "downside" scenario, which calculates the valuation if Sears were to go bankrupt and immediately vacate all the properties (ie. pay no rent past the day of declaring bankruptcy).

 

Gotcha. So you're just looking at multiples/comps or are you making estimates each year on recapture rates/annual rent per sq ft and then discounting?

[scorpioncapital]

You can also do a straight up DCF analysis on http://www.gurufocus.com/fair_value_dcf.php

 

Just make sure to adjust the starting earnings/share for the 31.6m (56.5% of the total reported figures in the supplement). Also I'm not sure if one should use FFO or NOI as the starting figure.

 

My assumptions where a requirement of 2x the rate of return on the anticipated 30 year bond. Currently it's 2.2% and I assumed it will be 4.5-5% and that you demand 9-10% as the cap rate.

 

Another assumption you'll have to make is what you see as the ultimate base rent per square foot and the time to achieve that. It's a decent clip...So far, they are 'mining' in place Sears base rents to non-Sears at a run-rate of about 10.6% per year.

 

While the large amount of square footage does suggest quite a bit of un-mined potential, just like in a gold mine, you have proved reserves and probable+inferred reserves. I would say that a % of the total square footage is probable+inferred. If you use the Pareto principle, there will always be 20% of anything that you might want to cut out as being largely unproductive. Not sure if their square footage includes parking space and auto centers and those might be considered last or much later in the development process. First they are going after the gold nuggets just lying around on the ground :)

 

(Btw, using those assumptions above gets you at or above current market price. But I see it much simpler. If redevelopment return is 12% and DCF shows a number even 1 cent higher than today's price with a cap rate of 9-10%, then you are going to get your 10-12% return.

 

The 4  variables you might want to answer are,

-will base rents be higher in 10 years by a factor of at least 2.

-will a recession increase your return greater than 12% by waiting for said recession and consequent drop in price.

-will the long bond experience a freak inflation accident and go above 5% in the next decade.

-will SRG require more dilutive capital/debt due to a recession or over budget costs.)

[glorysk87]

Ohh.

 

I have two valuations, one based on NAV and one based on FFO.  For both I have a "downside" scenario, which calculates the valuation if Sears were to go bankrupt and immediately vacate all the properties (ie. pay no rent past the day of declaring bankruptcy).

 

Gotcha. So you're just looking at multiples/comps or are you making estimates each year on recapture rates/annual rent per sq ft and then discounting?

 

The model I put together uses the following inputs:

 

- Sq Ft redeveloped per quarter

- SNO Rent PSF for recaptured space

- Redevelopment cost per sq ft

- Usable life of the asset (for amortization of redevelopment costs)

 

I also have a full financial model and the inputs above generally influence both the rental revenue and the expenses.

 

From there I have a cap rate sensitivity table for my NAV outputs and I have a comp multiple table for my FFO output.