SRG - Seritage Growth Properties

[Foreign Tuffett]

Sorry, I can't read the seekingalpha article b/c of the paywall. 

I'm assuming (based on my general understanding of retail, not from having read SHLDs annual report) that not every location is losing money.  Some must be profitable and others losing money, but on average the whole is losing money.  Since they've been handing back store leases for almost 3 years now, they must be handing back the ones that are losing the most and holding onto the ones that are profitable or could be turned around.

I'm not an expert but my understanding is that in bankruptcy the judge can decide which executory (contracts in which both sides have to perform, like a lease, as opposed to debt where only one side has to perform) contracts to keep and which to discharge.  If they do away with the master lease completely, they would lose the remaining profitable stores, the rights to sublet some of the valuable leases that they don't give back and the right to get paid if SRG wants to take back a lease that SHLD didn't want to give up.  So, for instance, if SHLD gave SRG back half the square footage of a giant box and SRG paid to redevelop it, the remaining half is worth a lot more if you can assign the lease to a 3rd party.

If SRG had individual leases for the properties, I think it would look a lot different, but if it's all under the master lease and the options are take it all or leave it all, then I think SHLD has some strong incentives to hold onto it or to use the threat of cancelling to renegotiate.  But they can't have it both ways, if they want to stay in the properties, then the master lease has to be accepted.  It's still too early to guess how this will play out.   

It's a link to a news story and comment thread. You might have to create a Seeking Alpha profile to read it, but it's free.

What you're saying makes sense, but I am skeptical that their stores that are 4 wall profitable can generate the cash flow to cover non-store overhead.

Also, at some point they are going to start suffering from reverse economies of scale as the store base continues to rapidly shrink. Let's assume they have 200 stores that are 4 wall profitable. If those 200 stores are scattered across the country it will be very difficult to right size the logistics and supply chain in a way that allows the company to be a viable enterprise going forward. IIRC American Apparel was an example of this issue. 

I'm not a bankruptcy expert by any means, but it wouldn't surprise me if all retail operations of the company are liquidated (a la Toys R Us) if they file.

[TwoCitiesCapital]

This has only be a small position (~2%) for me opened earlier this year around $40. When WB announced the $ and the stock jumped 20-25% shortly thereafter, I let go of the about 20% of the position to take all the gains off the table.

While the long-term development is intact, there are too many headwinds with rising rates and an expected Sears bankruptcy on the horizon to not take quick and easy gains like that.

Ultimately, I'd love to repurchase all of those share, and then some, but I want some of the negativity to be worked out and my guess there will be other opportunities to buy at lower prices than $50/share while that is happening. If we hit $40/share again, I expect I'll be buying back everything that was sold plus some.

[CorpRaider]

Not very scientific, but I decided a while ago to wait until sears filed and the press started talking about the potential for fraudulent transfer issues before looking more closely again.

[Shane]

We've known SHLD is going bankrupt for a long time, I believe the market expected it to most likely be this year or early next (based on sell side reports).  With the new loan from Berkshire... I view this as largely a non-issue.  We know the value is there and the path to realize it is pretty clear.  They will continue to develop properties and I would imagine some additional financing could be raised as they show progress.

Both Eddie and WEB have a vested interest in making this work.  Eddie controls the tenant going bankrupt and is a massive holder of SRG equity.  WEB owns the debt and a good slug of equity.  It is a pretty good set-up, IMO.

[RadMan24]

without that loan, the stock would be getting crushed. sears liquidation would hurt with no financing back drop and sharks would be swimming for higher rates. Everyone tried to sell the story 7% was highway robbery. It wasn't.

[BTShine]

without that loan, the stock would be getting crushed. sears liquidation would hurt with no financing back drop and sharks would be swimming for higher rates. Everyone tried to sell the story 7% was highway robbery. It wasn't.

Agreed. 

Also, Shane you’re right.  The present value of the rental stream from SHLD was not more than a couple hundred million.  The value created via redevelopment, if it goes well, is over $500m a year.  The real story here is redevelopment.  It’s not rent from SHLD.

[Saluki]

I would keep an eye on the cumulative redeemable preferreds.  I'm overweight SRG so I don't know if I'd buy more common, but I regret not getting the preferred (SRG-PA) when it was down at $20 (callable at $25). It pays over 7%, is cumulative and when it dropped down to $20 the effective interest rate was +11% if I recall correctly. It's higher up in priority than the common in case of bankruptcy, has a $25 liquidation preferrence and if the common is investable then the preferreds are money good.   

It's trading just under $23 now, so not a screaming bargain but if SHLD files for bankruptcy it might look attractive on the dip.

[Shane]

without that loan, the stock would be getting crushed. sears liquidation would hurt with no financing back drop and sharks would be swimming for higher rates. Everyone tried to sell the story 7% was highway robbery. It wasn't.

This is true, but the company has been working on a refinancing option for a long time.  The management is quality, they're not going to sit on their hands waiting for a disaster to strike.

[Candyman1]

SRG will lose about $33.5 million in revenues from SHLD it looks like based on the Q2 number. Out of total revenues for Q2 of $49.2 million. If one annualizes the SHLD payments one gets to a loss of revenue from SHLD of $134 million. Assuming there is a Chapter 7 filing. Not sure how much SRG will be able to get out of the SHLD Chapter 7 or 11 filing. Not sure how SHLD is able to make it through Chapter 11. Just the process will cost a lot of money.

[Candyman1]

without that loan, the stock would be getting crushed. sears liquidation would hurt with no financing back drop and sharks would be swimming for higher rates. Everyone tried to sell the story 7% was highway robbery. It wasn't.

This is true, but the company has been working on a refinancing option for a long time.  The management is quality, they're not going to sit on their hands waiting for a disaster to strike.

Keep in mind that at the same time SRG management is supposed to raise a lot more money it looks it is about to lose $134 million in revenue payments from SHLD. The Q2 loss would have been about $78 million rather than $44 million.