SRG - Seritage Growth Properties

[FCharlie]

Base rent of $300-$350mm seems way way too low for me.  If you assume $14/sq ft in rent on redeveloped properties that gets you to $552mm, and there's likely upside to that number down the road.

When I did my analysis (both NAV and FFO analyses) I calculated an intrinsic value of about $60-$65 2 years down the road.  Upside past that is much higher as the properties continue to be redeveloped.

My analysis also concluded that it will take 2-3 years for SRG to diversify their portfolio enough away from Sear's to be safe.  I have long dated puts on Sears as a hedge through that time frame. Past that, it should be able to survive even if Sears disappears off the Earth.

The big question for me is:

Beyond restricted cash, how will Seritage fund the renovations required to bring the rent up? Will they issue shares? Will they borrow? It's easy to see this stock being very valuable, but that's assuming they don't issue millions of shares to fund the redevelopment of stores.

[SlowAppreciation]

This might be a stupid question, but what is the top line # in the VIC valuation representative of? It increases along with increases in $/sqft, so is it some revenue multiple or something like that? 

[glorysk87]

This might be a stupid question, but what is the top line # in the VIC valuation representative of? It increases along with increases in $/sqft, so is it some revenue multiple or something like that?

Looks like he's calculating an NAV based off rent psf.

[scorpioncapital]

Looks like he's linking the total market capitalization of shares + operating partnership units from page 4 of the supplement that would result from the completion of redevelopment at various base rents for the entire portfolio.

[glorysk87]

Looks like he's linking the total market capitalization of shares + operating partnership units from page 4 of the supplement that would result from the completion of redevelopment at various base rents for the entire portfolio.

I'm not following you here.

[scorpioncapital]

I looked at it again but I'm not entirely sure how he's discounting rent per square foot to gross asset value. If you divide the net investment in real estate on the b/s by total gross square feet it comes out to about 10x the rent per square foot.

[SlowAppreciation]

I looked at it again but I'm not entirely sure how he's discounting rent per square foot to gross asset value. If you divide the net investment in real estate on the b/s by total gross square feet it comes out to about 10x the rent per square foot.

It seems like an odd detail to leave out considering it's the biggest piece of his valuation?

[SlowAppreciation]

Looks like he's linking the total market capitalization of shares + operating partnership units from page 4 of the supplement that would result from the completion of redevelopment at various base rents for the entire portfolio.

But how do you go from base rate to market cap? Market cap should reflect an increase in earnings/asset value, not the other way around. 

[SlowAppreciation]

Just wondering how do people value SRG? I get the conversion of real estate. I estimate if all the property is converted we could see base rents of perhaps $300-$350m in 4-5 years. How would one think about the mortgage rate and valuation for this income stream for a REIT? There are 57m shares out and debt is about 1 billion. So the current value (@ $48/share) is $2.7 billion equity + $1 billion debt. If all goes according to plan this would be a P/E of around 8-9x and a return of maybe 11-12% on your investment. Since this is the minimum return I'd like to get, is there a reason this would be worth more than ~$50/share to get that return in a few years? Obviously if rates stay at very low levels the market might value it more and if rates go back to somewhat more normal, it would be dangerous to overpay. But neither of these considerations change the return that an initial investor would demand on purchase price. Is real estate somehow valued at higher multiples - like a utility - due to being safer?

Base rent of $300-$350mm seems way way too low for me.  If you assume $14/sq ft in rent on redeveloped properties that gets you to $552mm, and there's likely upside to that number down the road.

When I did my analysis (both NAV and FFO analyses) I calculated an intrinsic value of about $60-$65 2 years down the road.  Upside past that is much higher as the properties continue to be redeveloped.

My analysis also concluded that it will take 2-3 years for SRG to diversify their portfolio enough away from Sear's to be safe.  I have long dated puts on Sears as a hedge through that time frame. Past that, it should be able to survive even if Sears disappears off the Earth.

So is your top line estimate just "total sq ft * avg annual rent per sq/ft"? And then you back out costs/expenses to get to your AFFO?

This is my first time valuing a REIT/Real estate so I know that the valuation models tend to be a little bit different.

[glorysk87]

As I said, I'm pretty sure he's calculating NAV.  He doesn't write out the actual calculation there, but he's using some assumptions to get from rent psf to NAV. The actual calculation is relatively simple.  Rent psf > rental revenue - operating expenses = NOI / Cap Rate = Real estate value.  Then he subtracts the liabilities to get NAV.

I could be wrong, but I'm pretty sure that's what he's doing.