On the CFO departure, I have nothing to add.
The Santa Monica property will definitely be of great value once leased. Finding a big office tenant, even for primo West LA real estate, just got a whole lot harder with COVID. I think that project will get leased and be very valuable but it will probably take a while - like years not months (but now I've said it I am sure they lease it up quick).
One risk is that a lot of their most valuable properties are in JVs with better capitalized partners who are in a great position to buy SRG out at advantageous prices. As an example, Simon Property Group have elected to not start redeveloping any of the Sears boxes in their JV with Seritage - all are vacant. I presume they are waiting Seritage out in order to buy those sites at firesale prices and not need to share the upside... Both Santa Monica and La Jolla are with Invesco and I think they have more time on the clock than SRG does.
I think Pupil has accurately described the Q3 results. Selling the vacant / small assets for ~$40 PSF and lowering the operating cash outflow from taxes, etc. is good. Getting a 5.9% cap on the income producing sales they are achieving feels very good in this market and reflects that the locations they have are very strong. However, as they sell income-producing assets to plug the operating cash outflow, it gets harder and harder to get to "escape velocity" where recurring income and asset sales covers not only running costs but provides the capital they need to build out their projects.
Q3 2020 NOI was $6m, which is ~$25m annualized, down slightly from Q2 2020. G&A is on track for $40m a year, annual interest is $115m and the pref is $5m a year. Thus Q2 2020 run rate cash burn is $135m a year or about $11m a month. Unless they refinance the debt, this is the amount of NOI they need to get in place to break even. From their Term Loan amendment it looks like they can defer interest payments if their cash balance gets below a certain threshold and that will definitely buy time.
However, it sounds like they need years to get the SNO developments finished and cash flowing - they keep highlighting the potential annual rent of $13.5m that will cost ~$30m in CAPEX to unlock over the next 12 months. In-place leases total $100m ($5m from Sears, $95m third party) with about $65m of signed leases. They need to take this total to $200m excluding the Sears leases to access Berkshires additional $400m facility - in the pre-COVID environment it would take at least a year to sign that many leases (based on their 2017-2019 pace) assuming they were to sell none of their income producing properties... That in of itself may be tough to accomplished. Berkshire might give them access to the $400m - they definitely have been constructive in working with SRG - but the question is what they will want in return?
COVID really came at the worst possible time for SRG. You can see that while they were signing $40m - $45m of leases per year in 2017 - 2019, their on track to only sign $7.5m in 2020. Pre-COVID, they were really close to getting to having the leases signed and capital in place to reach a stablized NOI that would cover their costs and generate the capital to reinvest in building out the bigger projects. This environment is just a knife fight it feels like. As leases get cancelled by retailers scaling back their growth plans, that's also shrinking the SNO lease pool. This is why development is risky - even with great locations and a good team, if you get the timing wrong, things get really really hard.
The crown jewels are definitely their large-scale projects that have great potential - mixed use, the 6,500+ multifamily units they are getting permits for. I just can't see a path for current equity holders to unlock those projects without major dilution in the best case. This is one I am monitoring to see if there is reason to think that they will get to escape velocity on the redevelopment program with rents starting to cover the fixed costs or if there is a recapitalization of some sort.
But I know I am one of the more negative voices on this one on this board - any more positive takes?
