SRG - Seritage Growth Properties

[accutronman]

With all the board discussion concerning Sears, there wasn't a dedicated thread regarding Seritage. I've held shares for awhile as I believe the property play is the endgame for Lampert and Berkowitz. Be interested in thoughts regarding Seritage.

[Sionnach]

http://valueinvestorsclub.com/idea/SERITAGE_GROWTH_PROPERTIES/137107

http://ir.seritage.com/Presentations

I think these two links summarize the thesis pretty nicely. Its a very interesting situation.

SRG is pretty similar to RSE which BAM bought not to long ago. So you have to figure there is some opportunity in redeveloping these beaten down properties.

[moneyball]

I'm a shareholder. The things I saw which led me to invest:

Significant ability to raise rents in next 3-10 years. Part of the knock on the stock is that pessimists argue you have to wait to raise rents (I've seen bullish projections that account for 100% recapture in 3 years which is dumb). But since the industry is based on P/FFO or NAV metrics there tends to be significant discounting of future growth in the current price.

Supply / Demand: malls aren't what they used to be as far as demand, but sales / sf have increased since recession (it's not all doom and gloom like you would be led to believe). Better than that however no one is building more malls really, but there is tenant demand and Sears spaces are huge and can be partitioned. Which leads me to my last point.

Large outlot / parking / standalone development opportunity and pipeline. Sears automotive units can be partitioned into in line outlets as shown in presentation above. Large standalone sites can be sold as dev opportunities (Santa Monica, St. Paul, Chicago) or developed in house. Since SRG already owns all the sites they can value add through entitlement process or complete development in house.

Lastly, major mall REIT JVs will, imo, be bought back by the partner at substantial premium as major mall reits have little area for inorganic growth.

[Sionnach]

can you explain that last point a little further moneyball? Are you saying GGP is going to buy back their seritage JV for example?

How long do you think it might to get the 50% recapture? Is 3-10 years the ballpark to get all 50% recaptures?

If you look at the VIC writeup - lets say they get to avg $9.05 /sqft in 5 years. They estimate that's a stock price of ~53, which is only 40% above todays price. Which wouldn't be the greatest CAGR if it took 5 years.

[scorpioncapital]

You know, I'm wondering if a mall tenant to replace Sears could be a large grocery chain like whole foods.

[accutronman]

I'm a shareholder. The things I saw which led me to invest:

Significant ability to raise rents in next 3-10 years. Part of the knock on the stock is that pessimists argue you have to wait to raise rents (I've seen bullish projections that account for 100% recapture in 3 years which is dumb). But since the industry is based on P/FFO or NAV metrics there tends to be significant discounting of future growth in the current price.

Supply / Demand: malls aren't what they used to be as far as demand, but sales / sf have increased since recession (it's not all doom and gloom like you would be led to believe). Better than that however no one is building more malls really, but there is tenant demand and Sears spaces are huge and can be partitioned. Which leads me to my last point.

Large outlot / parking / standalone development opportunity and pipeline. Sears automotive units can be partitioned into in line outlets as shown in presentation above. Large standalone sites can be sold as dev opportunities (Santa Monica, St. Paul, Chicago) or developed in house. Since SRG already owns all the sites they can value add through entitlement process or complete development in house.

Lastly, major mall REIT JVs will, imo, be bought back by the partner at substantial premium as major mall reits have little area for inorganic growth.

I agree the Sears auto center/outlot/parking provides some of the more intriguing possibilities. Additionally, the point made in the Value Investors Club article pertaining to what would occur in the event of a SHLD bankruptcy I hadn't thought about but is another positive for Seritage.

[moneyball]

can you explain that last point a little further moneyball? Are you saying GGP is going to buy back their seritage JV for example?

How long do you think it might to get the 50% recapture? Is 3-10 years the ballpark to get all 50% recaptures?

If you look at the VIC writeup - lets say they get to avg $9.05 /sqft in 5 years. They estimate that's a stock price of ~53, which is only 40% above todays price. Which wouldn't be the greatest CAGR if it took 5 years.

I think there is value accretion sooner than 5 years. I have been led to believe (by an executive at one of the jv partners) that the malls make a natural acquisition target that they would have to look at in the right scenario. Reading between the lines and considering that these jv assets were formed during the spin off, I think there's a good chance that after an initial safe harbor period that these assets get bid upon by the sponsor. Right now it seems that they are investing into these assets and repositioning the Sears space so that it can be leased. The big 3 mall reits now trade at something like  4.3 caps. I imagine they would add jump on the opportunity to add the SRG space to their portfolio at a 5 cap and own even more sf.

Then I think that longer term Sears will eventually file for bankruptcy / liquidate and the master lease will be rejected and all properties will revert back to SRG. The longer this takes to happen the better, as until then SRG has a robust pipeline were they can pick and choose which sites they want to redevelop. There are currently 21 properties were SRG has 100% recapture rights + 31 JV properties so a robust pipeline. I imagine SRG will continue to pick their spots and execute asset sales were appropriate. A portion of the non jv malls are still owned by Starwood, GGP and Simon. Plus you then have the standalones which are a different animal altogether. Note though some of the k mart spots are duds and probably completely worthless.

[moneyball]

You know, I'm wondering if a mall tenant to replace Sears could be a large grocery chain like whole foods.

It's not likely across a ton of the portfolio IMO, but there are instances where it is happening check link below:

http://www.seritage.com/retail/property/4588-virginia-beach-blvd/3312644/landing

[moneyball]

Also quickly to answer the question about the rents... by having the master lease in place we will see the highly opportunistic projects taken first (outparcel redevelopment at best malls, space reconfiguaration at malls with 99% occupancy, smaller spaces etc.) These opportunities can drive rents higher SRG quoted as being able to achieve ~25 per foot - 45 per foot at some of their developments. These move the needle only slightly when looking at overall rent psf basis across the portfolio, but if they are able to be sold off or recapped, then we see the needle move.

[Mephistopheles]

moneyball, jw how much do you account for redevelopment costs? Sears and Kmart stores aren't well maintained at all so with increased rents would come capex spend.