SRG - Seritage Growth Properties

[peridotcapital]

Last quarter they signed new third party leases totaling 214,000 square feet. How on earth can SRG recapture 50% of all the Sears space over the next 18 months?

On an ABR basis, not a Sq Ft basis. If you're measuring on Sq Footage you're basically missing the entire investment thesis.

Exactly, but that's not what you said.

[Picasso]

SRG needs about $190 million of NOI to stay within their mortgage covenants.  It's not enough to simply cover their interest expense and overhead in the bear case. 

[glorysk87]

SRG needs about $190 million of NOI to stay within their mortgage covenants.  It's not enough to simply cover their interest expense and overhead in the bear case.

They don't earn $190mm of NOI now...

[Picasso]

Sorry, $125 million of NOI.  I had the wrong amount of mortgage debt. 

[peridotcapital]

Operating expenses plus interest is roughly at a $160M run-rate. At $20/sf they would need to lease about 8 million of space to third parties to get there. Halfway there already.

[CorpRaider]

Yeah I did a rough comp too (I mean rough w/r/t my computation) based on the NOI generated by 3rd parties and leases signed but not yet in force and came up with about half of the break even run rate needed.  At some point in the next couple of years it seems like Lampert will have set himself up a neat little sort of "hedged position" on the future of the SHLD (at least brick and mortar) retail ops.   Sort of fascinating for me follow (during breaks in flailing myself for owning GM and reading the WSJ month long expose on how shitty my BAC/the banking bidness is now).

[glorysk87]

One thing I am a little curious about, and something that IR wasn't able to answer, is why property operating expenses and taxes have both been increasing pretty significantly over the last few quarters.  Not sure if it's a function of the renovated properties or not, but in order to get an accurate NOI figure, we really need to know where property operating expenses and taxes cap out. Do they increase forever as properties are redeveloped or should that expense growth taper off at some point? Any ideas?

[peridotcapital]

One thing I am a little curious about, and something that IR wasn't able to answer, is why property operating expenses and taxes have both been increasing pretty significantly over the last few quarters.  Not sure if it's a function of the renovated properties or not, but in order to get an accurate NOI figure, we really need to know where property operating expenses and taxes cap out. Do they increase forever as properties are redeveloped or should that expense growth taper off at some point? Any ideas?

Since the tenants are paying them it should not really be material to SRG's NOI. The company's net property operating expenses have held steady at under $1 million per quarter during that time.

[glorysk87]

Since the tenants are paying them it should not really be material to SRG's NOI. The company's net property operating expenses have held steady at under $1 million per quarter during that time.

Oh man. I totally disagree. I think it's absolutely critical information when contemplating the downside risk.  If Sears goes bankrupt then SRG is responsible for all of those expenses that were previously being reimbursed by Sears.  So the big question is why are those expenses increasing drastically? If they're driven by the redevelopments then that's something we need to know. If not, then it's related to Sears and makes SRG's exposure to SHLD even more risky than it already was.

[peridotcapital]

Since the tenants are paying them it should not really be material to SRG's NOI. The company's net property operating expenses have held steady at under $1 million per quarter during that time.

Oh man. I totally disagree. I think it's absolutely critical information when contemplating the downside risk.  If Sears goes bankrupt then SRG is responsible for all of those expenses that were previously being reimbursed by Sears.  So the big question is why are those expenses increasing drastically? If they're driven by the redevelopments then that's something we need to know. If not, then it's related to Sears and makes SRG's exposure to SHLD even more risky than it already was.

Of course it's due to the redevelopments. If you make improvements to a building, or expand on existing lots, the county is going to reflect that in their assessments. All county property records are public record and most are archived online. Subdividing space also increases operating expenses. Also, don't forget that Seritage bought the properties from Sears so those transactions will help local governments get their assessments as close to fair market value as possible. Those higher tax payments will flow through over the first 12 months as the new assessments come out.