SRG - Seritage Growth Properties

[moneyball]

Is there a reason they are paying a dividend at all if they use 90% of rental income for redevelopment? Or perhaps that would be the next move if there is some short-term distress?

Just REIT regulations. Just because they reinvest the cash does not mean they do not have to pay out dividends. 90% of all net income (read not cash flow which is better approximated by FFO/AFFO) has to be paid out in the form of dividends.

[scorpioncapital]

Is there a reason they are paying a dividend at all if they use 90% of rental income for redevelopment? Or perhaps that would be the next move if there is some short-term distress?

Just REIT regulations. Just because they reinvest the cash does not mean they do not have to pay out dividends. 90% of all net income (read not cash flow which is better approximated by FFO/AFFO) has to be paid out in the form of dividends.

I looked at Seritage financial supplement for the last 4 quarters (sine July 2015) and they have not had any net income at all. It's been a cumulative net loss of $30 million. Yet they are paying $1 per share dividend. Does this mean this is a voluntary dividend from cash-flow or cash on hand that is not legally required to be paid?

[thinkpad]

As far as I understand the legal details for REITs, SRG don't have to pay a dividend.
As a shareholder I would prefer they keep this cash to redevelop their properties...

[glorysk87]

Re: the dividend discussion - REITs generally have to strike a fine line. Often they have no net income, so legally they're not required to pay a dividend. However, if they pay out nothing, REIT investors shun the company and they lose out both in terms of liquidity and share price, which significantly increases their cost of equity.  Much of the time it is beneficial to pay a dividend just in order to keep the investor base satisfied.

I wish they could retain all cash as well, as I think it would be best for the company. However if they were to do this I believe a lot of shareholders would disappear, negatively impacting their share price and cost of equity.

[Mephistopheles]

Re: the dividend discussion - REITs generally have to strike a fine line. Often they have no net income, so legally they're not required to pay a dividend. However, if they pay out nothing, REIT investors shun the company and they lose out both in terms of liquidity and share price, which significantly increases their cost of equity.  Much of the time it is beneficial to pay a dividend just in order to keep the investor base satisfied.

I wish they could retain all cash as well, as I think it would be best for the company. However if they were to do this I believe a lot of shareholders would disappear, negatively impacting their share price and cost of equity.

In this case, it's majority owned by shareholders who I'm sure would rather have them retain the money as well - and would love the stock to go down. So I don't get why they need to have the dividend.

[benhacker]

REITs payout rules are based on taxable income (IRS) and not GAAP net income. 

I'm not sure without some expertise here, that you could tease out what their payout is required to be...

[alpha asset strategies]

http://seekingalpha.com/article/3985666-sears-almost-checkmate-must-pawn-stores-stay-game

Brad Thomas - a top-rated financial blogger / analyst who specializes in REITs - is actually advising to short SRG.  The primary issue of course is the highly uncertain future of its main tenant, SHLD.  Also, SRG has had a very nice run since Buffett's investment was made public.

I'm not sure what to make of this recommendation, but Brad Thomas does have an excellent track record:

https://www.tipranks.com/bloggers/brad-thomas

[glorysk87]

I've followed Brad Thomas for quite a long time. I have been very unimpressed. He doesn't seem to have any deep or critical thinking ability. He's very good at analyzing REITs based on their financial metrics, but when it comes to anything even remotely complex, he's totally lost.

There have been numerous examples where he's recommended REITs but completely and utterly missed important red flags. If you read his articles he almost NEVER does any of his own modeling or analysis. He simply copies and pastes stuff from either sell-side reports or other third party research. He tends to take things at face value, and simply parrots them back to his readers. (note, all of his exhibits in the SRG article are from B&S Research)

His decent track record comes from the fact that he almost exclusively writes about very conservative safe REIT investments, and started making his picks at the end of 2010.  Very hard to lose money over that time frame in REITs especially when focusing on safety/preservation of capital rather than absolute return.

He doesn't have a very strong background. IMO he's exceedingly average and has no real specialized knowledge in the space. So take that for what it's worth.

[alpha asset strategies]

I've followed Brad Thomas for quite a long time. I have been very unimpressed. He doesn't seem to have any deep or critical thinking ability. He's very good at analyzing REITs based on their financial metrics, but when it comes to anything even remotely complex, he's totally lost.

There have been numerous examples where he's recommended REITs but completely and utterly missed important red flags. If you read his articles he almost NEVER does any of his own modeling or analysis. He simply copies and pastes stuff from either sell-side reports or other third party research. He tends to take things at face value, and simply parrots them back to his readers. (note, all of his exhibits in the SRG article are from B&S Research)

His decent track record comes from the fact that he almost exclusively writes about very conservative safe REIT investments, and started making his picks at the end of 2010.  Very hard to lose money over that time frame in REITs especially when focusing on safety/preservation of capital rather than absolute return.

He doesn't have a very strong background. IMO he's exceedingly average and has no real specialized knowledge in the space. So take that for what it's worth.

glorysk87-

I have not researched SRG much at all and have no position.  As such, I have a few questions:

1.  Do you think SRG will face a funding gap - as Brad Thomas indicates?

2.  If there is a funding gap, do you think they will handle it via additional borrowing or by issuing equity?

Thanks!

[glorysk87]

I mean. Brad's whole "analysis" is based on the assumption that SHLD will put the maximum allowable properties to SRG every year.

He's saying that he thinks SHLD will vacate 7mm sq ft and put the properties back to SRG *next month*. If you operate under that assumption then of course they'll face a funding gap.  But that's an extreme assumption and I'm not sure it's based in reality.

I dunno. The whole article is rife with this whacked out doomsday assumptions. It's not a rational way to look at the company.