SRG - Seritage Growth Properties

[RadMan24]

On 5/25/2021 at 3:39 PM, Gregmal said:

I'd imagine thats the same pupil, aka Seritage Slayer, slicing and dicing up the dudes Twitter thesis...LOL

Otherwise, its just perplexing how once again, "I used Mohnish's calculation as a guide"...is the guiding factor for all these people. Can anyone do their own work? This continues to have all the hallmarks of a bad investment. I mean even using that poorly put together Twitter thesis, your bull case is what? SRG is worth what it was trading at a couple years ago?? When all the same characters owned it and pounding the table and were banking on more or less than same thesis? 

Can anyone honestly answer why you wouldnt just buy HHC? Deep down, if you truly understand the investment and mechanics necessary for this to work, its almost impossible not to conclude HHC covers all the same bases but gives you a much more favorable risk/reward profile. 

The answer is SRG can be today's HHC 10 years from now. I'm not saying one has to buy SRG, or that the risk/reward is favorable, in my situation, its just a hold, though I did add when it was in the low dollars, I mostly bought SRG prior to covid, but have no real sense or need to sell. Obviously, got lucky that BRK was behind the loan, as that's likely a one in a thousand event. Those buying today could do well, but they would need extreme patience for it to work. Plus, I'm willing to wait, especially if I get to see Pupil eat cow dung. This is a "show me" story, and that will take years. Anyone buying today hoping to hit it big in 3 years will be sorely disappointed, imo. 

[thepupil]

9 minutes ago, RadMan24 said:

The answer is SRG can be today's HHC 10 years from now. I'm not saying one has to buy SRG, or that the risk/reward is favorable, in my situation, its just a hold, though I did add when it was in the low dollars, I mostly bought SRG prior to covid, but have no real sense or need to sell. Obviously, got lucky that BRK was behind the loan, as that's likely a one in a thousand event. Those buying today could do well, but they would need extreme patience for it to work. Plus, I'm willing to wait, especially if I get to see Pupil eat cow dung. This is a "show me" story, and that will take years. Anyone buying today hoping to hit it big in 3 years will be sorely disappointed, imo. 

I think bear shit would be more appropriate. 

SRG getting that meme stock love, closing the YTD gap w/ other retail stocks!

I'd buy some if they were able to issue about $600mm of stock at the current price. 

 

 

Edited June 2, 2021 by thepupil

[Pistachio_Lawyer]

1 hour ago, thepupil said:

I think bear shit would be more appropriate. 

SRG getting that meme stock love, closing the YTD gap w/ other retail stocks!

I'd buy some if they were able to issue about $600mm of stock at the current price. 

 

 

Just out of curiosity Pupil, do you use a bloomberg terminal?

[thepupil]

yes. but i wouldn't pay for it w/ my own money. 

[Pistachio_Lawyer]

13 minutes ago, thepupil said:

yes. but i wouldn't pay for it w/ my own money. 

Bahahah fair enough! Still impressive for plebs like me. I have never seen one in person. Anyway we digressed. Thanks for the info

[erdospi]

On 6/2/2021 at 12:59 PM, RadMan24 said:

"got lucky that BRK was behind the loan"

Does one generally want to be on the other side of a loan from BRK?  

[BG2008]

15 hours ago, erdospi said:

Does one generally want to be on the other side of a loan from BRK?  

Much better than being on the other side of a loan from Brookfield or Oaktree 

 

[RetroRanger]

I just leave that here

 

Seritage prospect NAREIT Conference.PDF

[thepupil]

overall didn't really see anything new (good or bad).

 

did anyone have a more positive or negative impression? 

 

anyone have any insight as to why they're highlighting boca raton (other than the fact that it's a very good time to be long land in boca)?

to my knowledge there hasn't been progress on this and it's just an empty sears and a bank branch outparcel (connected to / adjacent to ) SPG asset Town Center mall, which is a great mall and deserves to exist. 
 

they're now dividing the portfolio into six pieces, and highlighting this as one of three premier retail assets. I agree the site has potential, but feels premature unless I missed some progress on their dev. plans here. 

 

https://trackingerrors.com/2021/04/

 

Quote

Seritage's Boca Raton property is similar in scope to the more advanced and nearby Aventura property. Unfortunately, due to a legal disagreement with the mall owner Simon, little progress has been made. The disagreement stems from SRG seeking city approval to redevelop the site into a mixed-use property (SRG was looking to add a hotel to the property). Simon claims to have a first right of refusal if the property is adapted into non-retail uses. SRG recently submitted a new retail only development plan, calling for 244k sqft of retail and no hotel. Speculation: The legal disagreement is the reason the Simon-Seritage joint venture properties have not been developed.

 

Edited June 8, 2021 by thepupil

[tiddman]

On 5/17/2021 at 9:41 PM, FCharlie said:

I have a question for the Seritage shareholders here.

 I would love to know what the Seritage faithful see in SRG that they don't see in competitor Macerich

 

Tried to reply once and my message got eaten, will try again.

 

To me the difference is the level of development. I'm more familiar with SRG than MAC but my understanding is that MAC is primarily a holder of completed/established mall properties. They have some development of around 600k square feet I think in one project. SRG on the other hand has completed somewhere around 40-45% of its square footage, the remainder encompasses millions of square feet of space in 15-20 projects that is in various stages of development, anywhere from idle to ground broken to under construction to completed, on the market, or newly leased. It's a giant redevelopment project that is around half way done.

 

This simple fact often seems to be lost when people try to find comps to SRG. They compare SRG, a development-stage company, to a REIT like MAC or CBT, and draw conclusions. But this is like comparing two houses, one of which is 95% done and rented and they're working on the porch, to another that is 50% built missing its windows, roof and kitchen. It's completely apples and oranges. If you compare SRG with half of its square footage undeveloped with another company that is 95% of its space developed it's not going to look very good.

 

With SRG it's all about how much capital they will need to complete development, where that capital will come from at what cost, the economics of the completed properties and how soon they can get them done, and execution risks along the way. With established REIT's is a different story about cash flows, leverage, occupancy, A vs. B properties, etc.

Edited June 8, 2021 by tiddman

[tiddman]

On 5/17/2021 at 5:05 PM, Mikekryan said:

Eddie Lampert sold out of Seritage, and other significant reductions. What are your thoughts on this?

 

I hate to open the deep, wide, gaping maw of a rabbit hole that is Sears, but there has been a theory going around that the Sears long term plan was to spin off all of its assets including Seritage, go through bankruptcy, emerge on the other side, and then buy back any assets that were valuable and hold them under a NOL umbrella. I personally am skeptical of this idea, but Eddie selling his stake in SRG may support this. He would probably not be allowed to enact such a merger if he controlled both companies so maybe he is selling his stake in SRG so he can acquire it with the shell that is Sears?

[Gregmal]

People bring it up because the difference is HUGE. If you are wagering on an asset repositioning play, you need some sort of cash flow. Having stabilized NOI(MAC/SPG, etc) or a business(Macy's for instance) you buy yourself time and during that period your assets can appreciate with the benefits going to the equity. When you lose money, this compounds itself in so many ways that are unfavorable to shareholders. We saw this with SHLD, we saw it to a degree with HHC, with JCP, and with SRG. You cant be running huge operating losses when your end game is repositioning/development. It effects everything from what your cost of capital is, all the way down to simply negating any appreciation in the asset value. I think DDS is a great case study on what can be done with proper capital allocation and a business that does breakeven or better. Its outperformed AMZN which I find incredible. Whereas there is no shortage of these hidden value plays where your operating expenses create a -5-10% annual headwind to your starting NAV. 

[Gregmal]

I would point to things like AIV, FRPH or ALCO as, at least what I try to look for. I can own these things and they can push out developments/repositioning of their assets as it makes sense; as its opportunistic, or they can sit on their asses and do nothing and not destroy value. All of the above if they do nothing with respect to the repositioning value thesis, they are still adding value. With SRG you are betting against the clock and something like COVID, or a recession, or any sort of disruption is devastating(hence an earlier comparison was made to SPG some months ago...SPG is back to pre covid levels and SRG is still halved). When you arent profitable, you eventually lose the ability to control your own destiny. 

[erdospi]

Isn’t the issue of the cost of redevelopment to get a reasonable yield (assuming tenants are available)? And right now that cost is skyrocketing and neighboring properties maybe over levered and cost may be lower and number of tenants are decreasing? 

[Cicero]

8 hours ago, thepupil said:

overall didn't really see anything new (good or bad).

 

did anyone have a more positive or negative impression? 

 

anyone have any insight as to why they're highlighting boca raton (other than the fact that it's a very good time to be long land in boca)?

 

Agree, not much new information. I thought the most interesting was what they did not talk about: Santa Monica (meaning lease up is going as badly as one would expect) + large scale non-retail developments (Hicksville, Denver, Redmond). Also though the illustrative math of the large scale projects was sobering. A lot of risk for relatively modest returns (though it includes the land at an attractive price). 

 

Sounds silly but I really do not like the management slide. Maybe reading something into it, but looks like Andrea Olshan is a bit of megalomaniac (only a picture of her towering above everyone else; not exactly the way to establish a collaborative team based environment). 

[tiddman]

18 hours ago, Gregmal said:

People bring it up because the difference is HUGE. If you are wagering on an asset repositioning play, you need some sort of cash flow

 

Not sure I totally follow... cash flow is obviously the ultimate goal but developing properties can be funded by many sources whether it be issuing equity i.e. preferred stock, debt, or internally generated cash from either NOI or asset sales. SRG has used all of these things. I don't think there is any requirement that the company be self-funding from an operating cash flow perspective, and no development stage or startup company is.

 

SRG will likely need one more chunk of some kind of funding to get over the hump, getting their square footage 60-70% developed. Doesn't look like they'll get the performance-based bump financing from Berkshire and they probably can't issue common or preferred at these prices. They are doing a pretty good job of asset sales but not sure they can sell enough to fund everything. And they don't want to sell their best properties so that they end up funding and developing the lesser properties. This I think is the challenge they face.

[Gregmal]

^ But if you dont internally generate cash, your ability and terms with which you have access to capital are limited. Again, just as an example, SPG got like $5B from note sales, IN 2020 during peak covid, at like 2%. Why? Because they are obscenely profitable. With respect to SPG which is embarking on very similar redevelopment projects as SRG, the only question is really, is the IRR going to be worth it. With SRG sure some have already popped in expected IRRs, but the real issue is where do they get the money, or if they even get the money. If you have to get creative you generally end up sacrificing profit. Someone earlier here touched on that they could put the land to the developer in a JV....but this will not yield the type of return everyone is penciling in if they go at it alone. 

[tiddman]

Borrowing money based on operating cash flows / profits is one way to go. However the ~$2B line that SRG got from Berkshire was not based on cash flows rather it was secured basically by the assets, it is development financing. This is why it carried a coupon of 7% rather than something like 3-4% which would have been typical for a mortgage. Development and construction financing comes in many forms and in the grand scheme of things 7% is not very hard money. There was also the preferred stock funded by Eddie also at 7% which was not based on any particular operating results.

 

Whether or not this is economically viable depends on the economics of the developed properties. But borrowing money at 7% to develop a property to increase its rent by 4x is a no brainer. Average property size about 140k sf. Average redevelopment per property about $16M or $114/sf. Average finished rent currently $18-20/sf. Pretty clear 10%+ ROI for all new capital. And once the property is completed it can either be refinanced with a mortgage at a lower rate or sold and the proceeds recycled into a new project. Assuming that they can successfully develop and let the properties (big assumption) honestly I don't really see what the problem is.

[thepupil]

2 hours ago, tiddman said:

Borrowing money based on operating cash flows / profits is one way to go. However the ~$2B line that SRG got from Berkshire was not based on cash flows rather it was secured basically by the assets, it is development financing. This is why it carried a coupon of 7% rather than something like 3-4% which would have been typical for a mortgage. Development and construction financing comes in many forms and in the grand scheme of things 7% is not very hard money. There was also the preferred stock funded by Eddie also at 7% which was not based on any particular operating results.

 

Whether or not this is economically viable depends on the economics of the developed properties. But borrowing money at 7% to develop a property to increase its rent by 4x is a no brainer. Average property size about 140k sf. Average redevelopment per property about $16M or $114/sf. Average finished rent currently $18-20/sf. Pretty clear 10%+ ROI for all new capital. And once the property is completed it can either be refinanced with a mortgage at a lower rate or sold and the proceeds recycled into a new project. Assuming that they can successfully develop and let the properties (big assumption) honestly I don't really see what the problem is.

 

I think both bulls and bears understand that deploying dev/redev capital at 10% yields creates a lot of value (once capitalized appropriately).

Bears think the g&a + interest + carrying costs of the fallow land/dark stores is/will continue to outpace value creation. Bulls believe otherwise. 

 

I think anyone short SRG greatly misunderstands SRG's biggest asset, which appears to me to be its faithful shareholders.

 

I am not trying to be snarky with this and am serious. It's clear the real estate focused folks (myself included) have their issues w/  SRG, but think it's equally clear that tons of people see things entirely differently. 

 

 

Edited June 9, 2021 by thepupil

[tiddman]

The bear theses I have heard do not seem to understand the value creation or development pipeline. They usually pick "B" mall REIT comps like CBL and PREIT, which are already struggling, and show that SRG's metrics/ratios/profitability are even worse than those, and conclude that SRG is headed out of business. This is often on the backdrop of assumptions that "retail is dead", "malls are dead" and "the Amazon effect". But as I noted I don't think these companies are comps at all, and I personally don't think retail is dead either.

 

To say that the costs of undeveloped space will outpace value creation only makes sense if the development either stops or is not successful since the see saw has been tipping for years. But I think it's not really debatable that they have executed their developments very well and have found good markets for JV's, leasing and selling and they have basically severed their ties with Sears.

 

I am not an ardent SRG bull necessarily but I have not heard a coherent bear thesis. The two main risks are in the execution of the development pipeline and that they either run out of funding or the cost of funding becomes so high that it is uneconomic to shareholders for example if they have to borrow at 12-15% or if they have to heavily dilute the common. I have not seen either of these things yet though as I noted I do think they are going to have to raise more funding at some point relatively soon.

 

The pandemic came at a really bad time for them because they were near an inflection point, and it disrupted not only their rent collections but their development pipeline. 2020 was pretty much a disaster but they appear to be intact currently and the economic environment for the next few years is very much in their favor.

 

[GordonGekko69]

On 5/29/2021 at 12:21 AM, Gregmal said:

I dont think its advisable to short puts on a long duration basis. The crux is to pinch off some of the obscene IV which if done correctly can generate ridiculous annualized returns. I generally dont look to go more than at most 3 months out. But typically you're looking for weekly or monthly in terms of duration. You just want to play the volatility, not hang around for the investment to work or not work. Best example was shorting the GME Apr $20 puts when the stock was at $350 in late January/February. Stock collapsed to like $50 in a few weeks and puts went from being worth $5+ to less than $1.50. It is once in a 5 year stretch or so type of situation where you can get that type of juice, but its quite common to get enough to make the trade worthwhile on many of the high short interest names. I used to do it all the time with stuff like DDS, RICK, FIZZ. I have no positions in SRG and no intention to initiate one so I am not recommending anything, but if you look even at the June 18 $15 puts you can effectively create a 1% monthly yield and you're only getting put the stock if it falls 10%+ in a couple weeks. Stock goes down, you keep rolling down. With share price decline IV should spike, giving you more premium. If I was an SRG enthusiast I would be all over a strategy like this. 

that descibes nicely what I am doing since December 2020. Nice profits I earned from this.

 

[samwise]

On 6/7/2021 at 11:25 AM, BG2008 said:

Much better than being on the other side of a loan from Brookfield or Oaktree 

 

 

What would BRK do if SRG can't pay back when the loan comes due? As the experienced real estate investors here have said, SRG hasn't yet stabilized a single asset and raised a low rate mortgage in the normal RE market (possibly the JVs were stabilized, but those were sold). If WEB is dead in three years(~45% chance per actuarial tables) , who makes this decision? The assets they have sold so far have all been at prices which would not cover the 1.6B.

 

Here are some things they could do, but not sure what they will do. With BAM and Oaktree, this would be much more predictable, since there is such a history of their behaviour with debt.

1. BRK could force default, own the land and develop it themselves. The capital problems of SRG disappear along with shareholders equity. Or sell the debt to BAM/Oaktree and let them do the dirty work. But does WEB like the optics of this and the effect on his folksy image? This also hits his own equity position in SRG(if he still owns it, but I feel he would be restricted and locked into the position if he gets MNPI from SRG as a lender?).

2. BRK could extend the loan, and might even need to give them more money. Probably not a big risk if SRG can really invest the money at 15% IRR. So eventually they would get a payback, and SRG shareholders will see the upside, but its not clear to me how much that upside is.

3. BRK extends the loan but dilutes the shareholders? warrants or convertible preferred shares perhaps.

[Gregmal]

I'd lazily presume something along the lines of 3. BRK would extend the loan and maybe even increase it, but take a pretty grizzly pound of flesh presumably in the form of warrants or convertibles. Since the press, and most normal people dont understand finance, this isnt likely to generate negative headlines..if anything it may even be viewed positively. This seems consistently with previous deals he's done. 

[samwise]

On 6/2/2021 at 2:07 PM, thepupil said:

I'd buy some if they were able to issue about $600mm of stock at the current price. 

 

 

Agreed Gregmal, that seems like the most likely way out. Like previous BRK deals it could be a convertible preferred. Isn't  that the same effect as the cash raise that pupil wants? (except for the likely 9% coupon, or PIK terms). Not sure why pupil thinks that makes the company more attractive. 

 

 

[thepupil]

I agree w/ Greg /#3 and in fact see this as a potential (positive) catalyst for SRG but also one that cuts off the tail upside scenario to a degree.

 

I think a reasonable outcome would be Berkshire converts its $1.6B loan to 2 instruments: and $800-$1B loan that attaches to the stabilized portfolio and is prepayable at par with asset sales / and or refinancing. you could justify a 5-6% rate for this (2% above market to pay berkshire for the trouble of providing a scale solution) and then some sort of mezz/pref that enjoys a higher return.

 

You pay off the senior w/ mortgages/asset level financings over time (probably can't do this all at once, Berkshire is basically providing a senior bridge loan to permanent financing. it's honestly confusing to me why SRG hasn't been doing any partial paydowns w/ mortgages, I would think Berkshire would approve getting 60 cents back on the stabilized asset value as it would still have a lien on the equity of any property and would de-risk. 

 

That leaves $600-$800mm. Think you raise $200-600 million to add more equity to cap structure via rights offering/ equity offering and use to fund development, pay off the berkshire mezz w/ asset level financings from that.

 

you'd end up w/ 20-50% more shares and a more sustainable cap structure that can self fund development. 

 

 

 

 

 

Edited June 10, 2021 by thepupil