SRG - Seritage Growth Properties

[mateo999]

I'm just happy I'm finally making some gains on WPG

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[Picasso]

I'm just happy I'm finally making some gains on WPG

+1

+1

[glorysk87]

I'm a bit late to the party here, but I have a few thoughts/questions/whatever.

First, on average rent/sf.  I've seen a few people in this thread say that they're valuing SRG based on an increase in the average base rent/sf to about $8 or $9.  Is this not way too low? Looking at Simon Property Group and GGP respectively, their portfolios run at $49.70 and $61.89 average rent/sf respectively.  Is there that much of a difference in the quality of the assets/locations that justifies the 80% discount to rent that people are assigning?  Or am I just dumb and missing something here?

Second - carrying cost of the portfolio.  Does anyone have a handle on this?  If SHLD ends up going into bankruptcy and is able to reject their leases, SRG is suddenly stuck with a few hundred non-cash flow producing properties that they have to carry.  Do we have any idea on the cost just to carry these properties?  While their leverage isn't exceptionally high for a REIT, it does put them in dangerous situation if they lose the cash flow from SHLD.  This is essential in understanding how long they'd be able to survive on their own while retenanting the old SHLD properties.  Not to mention they almost certainly wouldn't be able to pay their dividend under this scenario.

Third - what's the cost involved with recapturing and retenanting existing SHLD space?  If they don't spend the requisite money to redevelop the space does it have a negative impact on the rent/sf they're able to attain?

These are all very valid questions in my opinion and it doesn't seem that they're being contemplated.  I think the value creation here is enormous if the plan goes off without a hitch. But there are some drastically negative scenarios that I think need to be considered and discounted in the price.  Would appreciate input.

[neiljgsingh]

I'm a bit late to the party here, but I have a few thoughts/questions/whatever.

First, on average rent/sf.  I've seen a few people in this thread say that they're valuing SRG based on an increase in the average base rent/sf to about $8 or $9.  Is this not way too low? Looking at Simon Property Group and GGP respectively, their portfolios run at $49.70 and $61.89 average rent/sf respectively.  Is there that much of a difference in the quality of the assets/locations that justifies the 80% discount to rent that people are assigning?  Or am I just dumb and missing something here?

Second - carrying cost of the portfolio.  Does anyone have a handle on this?  If SHLD ends up going into bankruptcy and is able to reject their leases, SRG is suddenly stuck with a few hundred non-cash flow producing properties that they have to carry.  Do we have any idea on the cost just to carry these properties?  While their leverage isn't exceptionally high for a REIT, it does put them in dangerous situation if they lose the cash flow from SHLD.  This is essential in understanding how long they'd be able to survive on their own while retenanting the old SHLD properties.  Not to mention they almost certainly wouldn't be able to pay their dividend under this scenario.

Third - what's the cost involved with recapturing and retenanting existing SHLD space?  If they don't spend the requisite money to redevelop the space does it have a negative impact on the rent/sf they're able to attain?

These are all very valid questions in my opinion and it doesn't seem that they're being contemplated.  I think the value creation here is enormous if the plan goes off without a hitch. But there are some drastically negative scenarios that I think need to be considered and discounted in the price.  Would appreciate input.

+1

[moneyball]

I'm a bit late to the party here, but I have a few thoughts/questions/whatever.

First, on average rent/sf.  I've seen a few people in this thread say that they're valuing SRG based on an increase in the average base rent/sf to about $8 or $9.  Is this not way too low? Looking at Simon Property Group and GGP respectively, their portfolios run at $49.70 and $61.89 average rent/sf respectively.  Is there that much of a difference in the quality of the assets/locations that justifies the 80% discount to rent that people are assigning?  Or am I just dumb and missing something here?

Second - carrying cost of the portfolio.  Does anyone have a handle on this?  If SHLD ends up going into bankruptcy and is able to reject their leases, SRG is suddenly stuck with a few hundred non-cash flow producing properties that they have to carry.  Do we have any idea on the cost just to carry these properties?  While their leverage isn't exceptionally high for a REIT, it does put them in dangerous situation if they lose the cash flow from SHLD.  This is essential in understanding how long they'd be able to survive on their own while retenanting the old SHLD properties.  Not to mention they almost certainly wouldn't be able to pay their dividend under this scenario.

Third - what's the cost involved with recapturing and retenanting existing SHLD space?  If they don't spend the requisite money to redevelop the space does it have a negative impact on the rent/sf they're able to attain?

These are all very valid questions in my opinion and it doesn't seem that they're being contemplated.  I think the value creation here is enormous if the plan goes off without a hitch. But there are some drastically negative scenarios that I think need to be considered and discounted in the price.  Would appreciate input.

I'll be quick because I'm on mobile, but I think that these issues have been addressed here and on the SHLD thread.

I'll address one by one:
1.) SRG is not SPG, MAC or GGP. Their assets are more eclectic than the three major A mall reits. Sure they own assets at some of the big three malls, but this comprises only a portion of their assets. See the JPM credit prospectus that I posted a few pages back for details. Looking at a lot of b class malls, standalones, and community shopping centers. Rents here will not be as high esp for anchor tenant spots.
2.) Harder question. If SHLD went bankrupt it would be negative for the REIT as operating costs for the properties don't drop to zero if vacant. (Taxes, maintenance, electricity etc.) But as SRG continues to execute their plan more rents will come from 3rd parties. Look at how much already does. Also in bankruptcy all leases are voided SHLD cannot pick and choose.
3.) I would advise you look at company report and look at development yields. These have been talked about a lot and I think it would be beneficial to look over company presentations and then to look at people's opinions on how yields will play out over time. I think they will fall, cherry picking, a VIC write up from Feb was very optimistic (but maybe too much imo)

[scorpioncapital]

"In each of the initial and first two renewal terms, annual base rent will be increased by 2.0% per annum for each lease year over the rent for the immediately preceding lease year. For subsequent renewal terms, rent will be set at the commencement of the renewal term at a fair market rent based on a customary third-party appraisal process, taking into account all the terms of the Master Lease and other relevant factors, but in no event will the renewal rent be less than the rent payable in the immediately preceding lease year."

Does this mean that in year #3, Seritage and Sears will apply a 3rd party fair market valuation to the leases (assuming Sears is still in business)? Wouldn't that imply a potentially large increase in base rents just for trudging along?

[glorysk87]

I'll be quick because I'm on mobile, but I think that these issues have been addressed here and on the SHLD thread.

I'll address one by one:
1.) SRG is not SPG, MAC or GGP. Their assets are more eclectic than the three major A mall reits. Sure they own assets at some of the big three malls, but this comprises only a portion of their assets. See the JPM credit prospectus that I posted a few pages back for details. Looking at a lot of b class malls, standalones, and community shopping centers. Rents here will not be as high esp for anchor tenant spots.
2.) Harder question. If SHLD went bankrupt it would be negative for the REIT as operating costs for the properties don't drop to zero if vacant. (Taxes, maintenance, electricity etc.) But as SRG continues to execute their plan more rents will come from 3rd parties. Look at how much already does. Also in bankruptcy all leases are voided SHLD cannot pick and choose.
3.) I would advise you look at company report and look at development yields. These have been talked about a lot and I think it would be beneficial to look over company presentations and then to look at people's opinions on how yields will play out over time. I think they will fall, cherry picking, a VIC write up from Feb was very optimistic (but maybe too much imo)

1) So what are the appropriate comps here? Anyone have a resource for how to determine accurate market rents? While maybe they can't achieve $50/sf, it still seems to me that $8 or $9 is way too low.  Look at their most recent quarter - SNO leases came in around $24. Any reason that's not sustainable going forward?

2) They still have over 70% of their base rent from Sears.  At the current rate, they need Sears to stay solvent for at least a few more years before I'd feel comfortable with the level of diversification of the portfolio. This is my biggest concern currently, as I have no idea what the cost is to carry those properties if Sears goes bankrupt in the next year or so (which is likely).

3) I've spent a lot of time going through the presentations. The redevelopments seem pretty expensive to me.  The big concern I have is that it looks like they're quoting yield on cost based on (Incremental Revenue/Cost).  Shouldn't they be using NOI? Otherwise costs aren't taken into account. Unless they're purely triple-net with zero costs associated? Possible. But again, I just don't have the information to make the determination.

[namo]

"In each of the initial and first two renewal terms, annual base rent will be increased by 2.0% per annum for each lease year over the rent for the immediately preceding lease year. For subsequent renewal terms, rent will be set at the commencement of the renewal term at a fair market rent based on a customary third-party appraisal process, taking into account all the terms of the Master Lease and other relevant factors, but in no event will the renewal rent be less than the rent payable in the immediately preceding lease year."

Does this mean that in year #3, Seritage and Sears will apply a 3rd party fair market valuation to the leases (assuming Sears is still in business)? Wouldn't that imply a potentially large increase in base rents just for trudging along?

Not at all. You missed the text right above this:

The Master Lease has an initial term of 10 years and contains three options for five-year renewals of the term and a final option for a four-year renewal.

So what you describe would happen in 20 years.

[scorpioncapital]

It did seem too good to be true. In 20 years, it's almost certain the US dollar will be halved!

[peridotcapital]

1) So what are the appropriate comps here? Anyone have a resource for how to determine accurate market rents? While maybe they can't achieve $50/sf, it still seems to me that $8 or $9 is way too low.  Look at their most recent quarter - SNO leases came in around $24. Any reason that's not sustainable going forward?

There are plenty of retail REIT comps that trade publicly. Class B malls like WP Glimcher. Strip centers like Kimco. We are talking average rents in the high teens to mid 20's. That is what you can expect from the average non-Sears tenant.

Make some assumptions about the amount of space that SRG can redevelop every year and you can come up with a good approximation of what level of FFO Seritage is going to be looking at 5 or 10 years from now. Then pick a multiple, discount it back to today's dollars and see how it compares with the current price.

Another helpful exercise is to assume you wake up tomorrow and Sears has been replaced completely. How would you value SRG if portfolio-wide they were 95% leased at $25/sf tomorrow? Then figure out how many years it will take to get there (hint: a lot) and discount that value back to today.

My personal calculations show that while SRG at current prices is not a terrible investment on an annualized basis, it is not a home run either.