SRG - Seritage Growth Properties

[scorpioncapital]

All good points, one additional metric that is very important in investing is how much money do I get on my investment? While the initial yield may be lower, eventually it moves up or down to the ROIC. So for example, if Seritage invests $1 and earns $1.13 on that investment and Seritage current yield is 5%, then the next year the yield increases to 5.65%. You have a bond but with an expanding coupon. That coupon is part inflation protection and part real return. Eventually if all things are equal, an investor who is patient enough should be getting the full 13% return on purchase price after some number of years. But this is a good question...many stocks/companies start with a yield far lower than the internal return on capital. This may be because this is a cash-cow so has a base starting rate. Any other ideas why initial yields are never the return on invested capital - except possibly in a crash, when yields also dip but a long-sighted investor might assume it will normalize again in the future?

[SlowAppreciation]

All good points, one additional metric that is very important in investing is how much money do I get on my investment? While the initial yield may be lower, eventually it moves up or down to the ROIC. So for example, if Seritage invests $1 and earns $1.13 on that investment and Seritage current yield is 5%, then the next year the yield increases to 5.65%. You have a bond but with an expanding coupon. That coupon is part inflation protection and part real return. Eventually if all things are equal, an investor who is patient enough should be getting the full 13% return on purchase price after some number of years. But this is a good question...many stocks/companies start with a yield far lower than the internal return on capital. This may be because this is a cash-cow so has a base starting rate. Any other ideas why initial yields are never the return on invested capital - except possibly in a crash, when yields also dip but a long-sighted investor might assume it will normalize again in the future?

Yeah the more time I spend on it, the more I think you kind of have to look at SRG in stages. No one valuation model or method does it justice.

If you aggressively assume SRG redevelops 100% of the remaining 34.5m/sqft of their GLA at an average redevelopment cost of $100/sqft, then you're looking at an additional $3.4b capital outlay. If they can charge $15sqft across the portfolio, you're looking at a ~14%-16% yield at some later point ($470m NOI/$3.4b). Maintenance CapEx probably won't be huge at this point either.

The tricky part is figuring out if those assumptions are reasonable, and how long it will take to achieve them. And as you mentioned, am I okay with a 5% yield today that will expand over time?

[scorpioncapital]

From what I've observed the starting initial yield has two components:

1. Pure mispricing, misunderstanding of risk, etc.. where value investors make a living.
2. The real or perceived quality, safety, and long-term stability of the earning stream. Basically the higher the quality of the business, the lower the starting yield. Think maybe Coca Cola vs Dow Chemicals. Perhaps both make the exact same amount of free cash flow at some point in time but one may be cyclical, another less so. One might have less conviction that the earnings will be stable, not change, or materialize in 50 years, the other might not.

Seritage it's hard to say the quality of the earnings but if the value of the real estate is there and the land and development is good I can't see why it can't last a long time.

[KJP]

Any other ideas why initial yields are never the return on invested capital - except possibly in a crash, when yields also dip but a long-sighted investor might assume it will normalize again in the future?

The "initial yield" you appear to be referring to is the current earnings or FCF yield of the security at the investor's purchase price.  Holding future growth constant, that "initial yield" is inversely related to the company's anticipated future ROIC.  The reason for this is that the higher a company's future ROIC is -- i.e., return on incremental invested capital -- the more valuable its future growth is.  This is another way of saying that, holding growth constant, higher ROIC companies deserve higher P/Es.  The math behind this is laid out in many articles on ROIC and in McKinsey's Valuation treatise. 

[BTShine]

The company has stated they expect an 11-12% un-levered yield on future developments.  These developments will be levered at some point, which means they'll pay about 5% on the debt and see excess returns of 6 or 7%.  If they're doing this at $100/sqft on 2 million sq/ft of property each year, then we'd see about an extra $200 million in equity value created.  How?   

The two million square feet will see levered returns of around $14 million per year (as shown above).  With a conservative cap rate of 7% this means the value of this development is $200 million ($14 million / 7% = $200 million). 

With these round, yet fairly accurate numbers, we can assume every 1 million square feet that is redeveloped creates $100 million in value for SRG shareholders.  Spread over 55 million shares it's about $2/share. 

[muscleman]

http://www.debtwire.com/info/2016/12/16/sears-hit-cash-advance-requests-vendors/

In 3Q, Sears also terminated the leases of 17 underperforming stores owned by Seritage Growth Properties, a publicly traded REIT.


SHLD's market cap just crossed below 1bn. The pace of lease termination may accelerate.

[thinkpad]

hello

http://ir.seritage.com/file/Index?KeyFile=37276443

200m$ to fund redevelopment (debt issued by ESL)

[scorpioncapital]

Cool, but you know in math we have something called order of operations. Is there a reason you get a loan first instead of stopping the dividend and getting a loan? It's like a bathtub you are putting some water in but also taking some water out

[Mephistopheles]

Cool, but you know in math we have something called order of operations. Is there a reason you get a loan first instead of stopping the dividend and getting a loan? It's like a bathtub you are putting some water in but also taking some water out

From the 10-k:

In general, participating employees are required to remain employed for vesting to occur (subject to certain limited exceptions). Restricted shares that do not vest are forfeited. Dividends on restricted shares and share units with time-based vesting are paid to holders of such shares and share units and are not returnable, even if the underlying shares or share units do not ultimately vest. Dividends on restricted shares with performance-based vesting are accrued when declared and paid to holders of such shares on the third anniversary of the initial grant subject to the vesting of the underlying shares.

Unvested restricted shares at end of period

         221,484             $   30.81    

[Foreign Tuffett]

In four months RBC has gone from initiating coverage on SRG as a "Top Pick" to downgrading it twice. That was fast.

I don't have access to the report, but my guess is that they are concerned about the risk of a SHLD bankruptcy.