valuetrojan10 Posted June 9, 2015 Share Posted June 9, 2015 From the 1Q2015 10-Q: On April 1, 2015, April 13, 2015, and April 30, 2015, Holdings and General Growth Properties, Inc. ("GGP"), Simon Property Group, Inc. ("Simon") and The Macerich Company ("Macerich"), respectively, announced that they have entered into three distinct real estate joint ventures (collectively, the "JVs"). Holdings contributed 31 properties to the JVs where Holdings currently operates department stores (or leases former stores to third party tenants), in exchange for a 50% interest in the JVs and $429 million in cash ($426 million, net of closing costs). The transactions value these properties at $858 million in the aggregate. Holdings has agreed to lease back the properties from the JVs under triple-net master lease agreements (the "Master Lease"). The Master Lease will extend for a period of 10 years, with two five-year renewal options. The initial amount of aggregate base rent under the Master Lease will be $42 million and increases at 2% per year. The JVs have the ability to recapture up to 50% of the space leased to Holdings and then re-lease this space to other tenants. So it looks like the JV properties are being valued at a 4.9 cap. Merkhet, I think the valuation on the REIT is even less than a 4.9 cap. I think expenses have to be taken from gross base rent to get a sense for NOI/Price to get cap rate. Assuming 65% NOI Margins (which seems fairly supported in the industry) it looks like the REIT is closer to a +3% cap rate. Link to comment Share on other sites More sharing options...
merkhet Posted June 9, 2015 Share Posted June 9, 2015 Do you mean corporate expense or other expenses? IIRC, these are triple net leases, right? Link to comment Share on other sites More sharing options...
valuetrojan10 Posted June 9, 2015 Share Posted June 9, 2015 Do you mean corporate expense or other expenses? IIRC, these are triple net leases, right? I was thinking about operating expenses, but you're right. These are NNN leases and your calculation is correct on the rate. My mistake. Link to comment Share on other sites More sharing options...
hardincap Posted June 9, 2015 Share Posted June 9, 2015 Anyone else notice Berkowitz vastly reduced his direct ownership earlier this year? From 900k to 71k or so. This was in the low $30s. Not sure what that means, because he's since bought at higher prices for his fund Link to comment Share on other sites More sharing options...
Picasso Posted June 9, 2015 Share Posted June 9, 2015 Seritage isn't expecting any meaningful increase in EBITDA until 2019. At $200 million of EBITDA and a 10x multiple you get around $839 million of equity value. On 53 million shares you have a potential price of $16. Will the market let it trade for 10x when the low end of comps are in the 11-12x area? I could see that happening given the nasty drop in SSS for Sears and over 90% concentration to one tenant. The rights offering doesn't really interest me since I can't get a handle on the margin of safety. If anything, it looks like SHLD will be getting a fair price for these assets. Doesn't seem like the new CEO has a lot of skin in the game either. Link to comment Share on other sites More sharing options...
thinkpad Posted June 9, 2015 Share Posted June 9, 2015 Anyone else notice Berkowitz vastly reduced his direct ownership earlier this year? From 900k to 71k or so. This was in the low $30s. Not sure what that means, because he's since bought at higher prices for his fund are you sure ? where did you get this information ? Link to comment Share on other sites More sharing options...
gfp Posted June 9, 2015 Share Posted June 9, 2015 He's referring to the difference between these two filings, but I believe the shares were just put into a family partnership and private foundation as per the footnote on the second filing here: http://www.sec.gov/Archives/edgar/data/1214344/000091957415000897/xslF345X03/p6343332.xml http://www.sec.gov/Archives/edgar/data/1214344/000091957415002299/xslF345X03/p6386709.xml " The securities reported include a total of 841,300 securities held in a family partnership and a private foundation. These securities were previously reported under the Reporting Person's direct ownership. These securities were not involved in any transaction(s) reflected on this Form 4." Link to comment Share on other sites More sharing options...
valuetrojan10 Posted June 9, 2015 Share Posted June 9, 2015 Seritage isn't expecting any meaningful increase in EBITDA until 2019. At $200 million of EBITDA and a 10x multiple you get around $839 million of equity value. On 53 million shares you have a potential price of $16. Will the market let it trade for 10x when the low end of comps are in the 11-12x area? I could see that happening given the nasty drop in SSS for Sears and over 90% concentration to one tenant. The rights offering doesn't really interest me since I can't get a handle on the margin of safety. If anything, it looks like SHLD will be getting a fair price for these assets. Doesn't seem like the new CEO has a lot of skin in the game either. Aren't there 55.5 million shares outstanding since the private placement shares by GGP/SPG are in addition to the common shares offered in the 53.3 million offering? Link to comment Share on other sites More sharing options...
Picasso Posted June 9, 2015 Share Posted June 9, 2015 That sounds right valuetrojan. The 2025 estimate for EBITDA in the filing is only about $274 million. So they are offering at 10x 2025 estimates. I just don't see the attraction here unless they are low balling the figures as much as possible. Maybe it was also their secret plan to kill 1Q SSS in order to cause distaste for a REIT with 90% of tenants tied to SHLD. Does anyone have a bull case or reason to participate without seeing where the rights start trading? I'm guessing they will trade without a lot of value but who knows. Link to comment Share on other sites More sharing options...
20ppy Posted June 9, 2015 Share Posted June 9, 2015 After the dust settles, shld will be getting ~3 billion dollars for Q2, that's one time ~$28 per share earnings, how is the stock price going to reconcile with that ? Weird indeed. Link to comment Share on other sites More sharing options...
BTShine Posted June 9, 2015 Share Posted June 9, 2015 One bull argument for SREIT is the opportunity to retennant some space at higher rates. Another is the potential to redevelop some locations and build more sq ft for re-leasing. That's one hidden value argument. Obviously the bear case would include Sears Kmart leaving 20% of the space every year with the potential the vacant space isn't attractive enough to other tenants. Link to comment Share on other sites More sharing options...
Picasso Posted June 9, 2015 Share Posted June 9, 2015 The guidance appears to include that redevelopment potential. There is also an estimate done by Duff and Phelps that gave the redevelopment some value ranges. Link to comment Share on other sites More sharing options...
constructive Posted June 9, 2015 Share Posted June 9, 2015 How much is SHLD annual cash burn going to increase as a result of paying all this rent to Seritage and joint ventures? $260M pro forma Seritage revenue + $42M JV revenue - $24M NNN operating expenses (previously SHLD's, now SREIT's) = $278M Is that accurate and if so how will it impact SHLD's business strategy? Link to comment Share on other sites More sharing options...
Picasso Posted June 9, 2015 Share Posted June 9, 2015 CNBC did a little segment on how poorly the Lampert era Sears spinoff and rights offerings have done. I am surprised they left out SHOS and OSH since they have been massive losses to investors who held. Good for an initial pop in both cases but not great long-term. Karen Finerman completely got wrong the performance of the debt/warrant offering as she claimed a 4% loss. I show over $1.1 billion of value versus a purchase price of $625 million. She also ignored the performance or benefit to SHLD. Lands End gave $500 million to SHLD and OSH was able to take off some of the debt burden. Buying SHLD during the last rights offering gave you a pretty nice return as well. As always an interesting situation with Sears. Lots of different pieces to the pie and you can usually find a part of it that exhibits some good value. SHOS gave a presentation showing improvement in the business and the stock barely budged for a couple days. You could have made around 40% just by reading their presentation and buying after the news hit. Even Lands End gave a good short opportunity on what was terrible 1Q earnings and a good read through into SSS at SHLD. The market seems so slow to reprice these stocks both on the upside and downside. Link to comment Share on other sites More sharing options...
Picasso Posted June 10, 2015 Share Posted June 10, 2015 Rights are trading when issued at $3.11. Since it takes two to buy one share of SRG at $29.58 it implies a price of $35.80 or 15x EBITDA. Anyone want to take a stab in case my math or logic is wrong? It really doesn't look attractively priced to me. Link to comment Share on other sites More sharing options...
Luke 532 Posted June 10, 2015 Share Posted June 10, 2015 The cash Lampert will have in SHLD vs. the market cap is very, very interesting. He won't have free reign on what to do with it, but still very interesting. Link to comment Share on other sites More sharing options...
Picasso Posted June 10, 2015 Share Posted June 10, 2015 Good point Luke. We will be trading under the cash balance fairly soon. Warrants are finally getting hit as well. If you include potential dilutive effect from the warrants then it has a little more ways to go before it trades under cash. Link to comment Share on other sites More sharing options...
Luke 532 Posted June 10, 2015 Share Posted June 10, 2015 Warrants are finally getting hit as well. Yes they are, but nearly non-existent volume today. Link to comment Share on other sites More sharing options...
Pelagic Posted June 10, 2015 Share Posted June 10, 2015 I'm having a little trouble wrapping my head around today's price action. SHLD received close to their entire current market cap in cash for the SRG and j/v transactions for approximately 13.5% of their locations. Meanwhile SRG's implied price via the rights has gone up from $29.58 to currently $42.18 (rights at 6.30). Wouldn't SRG's implied price trading up bode well for the remaining SHLD locations? Even if SHLD's management squanders some of the cash they received, I still have trouble agreeing with the current valuation where essentially nothing is assigned to the remaining locations and brands after liabilities are accounted for. Link to comment Share on other sites More sharing options...
Luke 532 Posted June 10, 2015 Share Posted June 10, 2015 I'm having a little trouble wrapping my head around today's price action. SHLD received close to their entire current market cap in cash for the SRG and j/v transactions for approximately 13.5% of their locations. Meanwhile SRG's implied price via the rights has gone up from $29.58 to currently $42.18 (rights at 6.30). Wouldn't SRG's implied price trading up bode well for the remaining SHLD locations? Even if SHLD's management squanders some of the cash they received, I still have trouble agreeing with the current valuation where essentially nothing is assigned to the remaining locations and brands after liabilities are accounted for. Don't underestimate the power of a market to see a stock off sharply and then pile in on the short side with no regard to financials, valuations, etc. The media is all over "down 18% today" with total disregard to the rights shareholders now have in their accounts valued at $6+/share. Just more of Mr. Market being Mr. Market. Edit: SHLD + rights mean SHLD on the whole is down about 40 cents on the day. Link to comment Share on other sites More sharing options...
peridotcapital Posted June 10, 2015 Share Posted June 10, 2015 I'm having a little trouble wrapping my head around today's price action. SHLD received close to their entire current market cap in cash for the SRG and j/v transactions for approximately 13.5% of their locations. Meanwhile SRG's implied price via the rights has gone up from $29.58 to currently $42.18 (rights at 6.30). Wouldn't SRG's implied price trading up bode well for the remaining SHLD locations? Even if SHLD's management squanders some of the cash they received, I still have trouble agreeing with the current valuation where essentially nothing is assigned to the remaining locations and brands after liabilities are accounted for. They sold about 40% of their owned stores, and included were a majority of their best locations. A number like the 13% you reference is probably not all that relevant since all stores are not created equal. Getting cash approximating their market cap might sounds great, but now they are left with higher rent payments and about $6 billion of debt/pension obligations. For them to fully repay their revolver (which they have said they plan on doing) and fill the hole of 2015 cash burn on the retail side, they are probably going to use up $1.5 billion of the $3 billion received by the end of the year. And then they have to deal with same store sales that are reaccelerating to the downside because Eddie is cutting back on promotions to stem the retail losses on a % of sales basis. The action since Monday's close probably reflects people selling SHLD and buying the rights to have more exposure to the real estate and less to the stub company. The rights may have doubled from $3 to $6, but I don't think that means that Seritage is going to trade at $42 once the dust settles. The prices this week are likely just due to supply and demand based on investor repositioning. Link to comment Share on other sites More sharing options...
adesigar Posted June 10, 2015 Share Posted June 10, 2015 I'm having a little trouble wrapping my head around today's price action. SHLD received close to their entire current market cap in cash for the SRG and j/v transactions for approximately 13.5% of their locations. Meanwhile SRG's implied price via the rights has gone up from $29.58 to currently $42.18 (rights at 6.30). Wouldn't SRG's implied price trading up bode well for the remaining SHLD locations? Even if SHLD's management squanders some of the cash they received, I still have trouble agreeing with the current valuation where essentially nothing is assigned to the remaining locations and brands after liabilities are accounted for. Don't underestimate the power of a market to see a stock off sharply and then pile in on the short side with no regard to financials, valuations, etc. The media is all over "down 18% today" with total disregard to the rights shareholders now have in their accounts valued at $6+/share. Just more of Mr. Market being Mr. Market. Edit: SHLD + rights mean SHLD on the whole is down about 40 cents on the day. have you received the rights ? Sears Holdings is distributing to its stockholders, at no charge, one transferable subscription right for every share of Sears Holdings common stock held of record as of 5:00 p.m., New York City time, on June 11, 2015, the previously announced record date. Link to comment Share on other sites More sharing options...
Luke 532 Posted June 10, 2015 Share Posted June 10, 2015 have you received the rights ? Yes. Broker: IB Link to comment Share on other sites More sharing options...
gr33ngi4nt Posted June 10, 2015 Share Posted June 10, 2015 Anyone know how this rights offering would impact a short put and warrant position? How does the exercise price get adjusted? Thanks Link to comment Share on other sites More sharing options...
hyten1 Posted June 10, 2015 Share Posted June 10, 2015 damn tdameritrade, I need to switch to IB have you received the rights ? Yes. Broker: IB Link to comment Share on other sites More sharing options...
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