SRG - Seritage Growth Properties

[Gregmal]

It seems like Macys and BAM are going to be dumping a lot of SF on the market too.  I really can't see why a department store would exist anymore unless it is in a convenient urban location (you know like they were originally).

Yup. I've long loved and followed the SHLD story. SRG was basically the crux of the story being put into a safety asset. I've wanted to own this forever but the things you mentioned and the overall secular decline for the entire retail sector makes this hard to really leap at. It long been my personal take that the day SHLD files for bankruptcy will be within a 6 month window of when the optimal time to initiate a SRG position occurs. But the developments with M & Co could mean even more of the same type of asset coming to market all around the same time, which gives me further pause.

[dutchman]

Peridotcalital you were regretting having missed this in the 30s.  Are you buying here?  I guess shld bankruptcy could introduce some unknown unknowns.

[KJP]

Why do people like this more than/why does it generate so much more interest than Howard Hughes? 

Put another way, why are people more interested in the opportunity to invest a lot of capital into Sears' collection of real estate, as opposed to Howard Hughes' assets, e.g., Ward Village, the South Street Seaport, the Woodlands and Columbia, MD?

[KCLarkin]

Why do people like this more than/why does it generate so much more interest than Howard Hughes?

I'm not a fan of real estate plays. But isn't the thesis for SRG pretty simple? Sears is paying below market rents. Eventually, these assets will be re-let at market rates. A bit similar to buffett's real estate near NYU?

HHC might be more attractive, but the thesis is more complicated.

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Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant -- who occupied around 20% of the project’s space -- was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

[Mephistopheles]

I don't see SHLD going bankrupt any time soon. Lampert will continue with asset sales/provide financing which will keep it afloat for the medium term, by when hopefully SRG has enough in commitments to be break even without the SHLD rent.

The big risk imo is the simultaneous closings of stores across the country: SHLD, Macy's, Kohl's, WMT, everything. It's likely that the class B and C properties of SRG will suffer quite a bit as a result. The real value is in the class A properties which are still very strong.

[KJP]

I'm not a fan of real estate plays. But isn't the thesis for SRG pretty simple? Sears is paying below market rents. Eventually, these assets will be re-let at market rates. A bit similar to buffett's real estate near NYU?

HHC might be more attractive, but the thesis is more complicated.

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That may be a concise statement of the SRG thesis, but it glosses over significant complexity.

Both SRG and HHC are development plays that will stretch over decades.  So, at a very high level, what's actually easier to assess:  (i) the effects of a potential SHLD bankruptcy and estimating demand and "market rents" for Sears-type assets sprinkled all over the country over the next 10-20 years, or (ii) whether, over the next 20 years, there will be continued demand for housing and office/retail space in Honolulu, a high-end Houston suburb (which is entirely controlled by HHC), a very high-end Las Vegas suburb, and a small city midway between Baltimore and DC, along with continued demand for access to the South Street Seaport?

I think (ii) is actually easier to understand and assess than (i).  I'm not saying HHC will definitely turn out to be a better investment than SRG.  I'm just surprised that people interested in long-term development plays aren't more interested in the company that appears to have much better assets.

EDIT:  Also, regarding your Buffett example, aren't HHC's assets more like being "next to NYU" than the Sears/SRG assets? 

And you may be right that all real estate plays are somewhat dubious, because the underlying return to investors depends in part of how fast the assets are developed, which is impossible to predict accurately when you're talking about developments/land sales over decades.  But given that fact, isn't it even more important to favor the assets that are most likely to continue to appreciate over time ( e.g., oceanfront land in Honolulu, South Street Seaport) versus real estate assets in flux (malls)?

[KCLarkin]

Both SRG and HHC are development plays that will stretch over decades.

I think the issue is that the HHC portfolio is more eccentric. Mixed-use. Suburbs. Downtowns. Hawaii. Vegas. The Seritage portfolio is more uniform and therefore simpler to understand.

So, back to your original question. Why does SRG generate more interest than HHC? Because it is easier to understand. With HHC, you need to analyze property by property. With SRG, I think you could get pretty far just making some portfolio-level assumptions.

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The other obvious reason why SRG attracts interest is that Buffett bought it in his PA.

[KJP]

I think the issue is that the HHC portfolio is more eccentric. Mixed-use. Suburbs. Downtowns. Hawaii. Vegas. The Seritage portfolio is more uniform and therefore simpler to understand.

So, back to your original question. Why does SRG generate more interest than HHC? Because it is easier to understand. With HHC, you need to analyze property by property. With SRG, I think you could get pretty far just making some portfolio-level assumptions.

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The other obvious reason why SRG attracts interest is that Buffett bought it in his PA.

Fair enough.  It may indeed take five spreadsheets rather than one for some investors to feel comfortable with HHC, and the Buffett point is undoubtedly true.  But I do believe the "portfolio-level assumptions" being made for SRG are sweeping a fair amount of complexity under the rug, and that HHC's assets are better. 

[scorpioncapital]

It feels like loans to SHLD are subsidizing SRG via the rental income. If that stops, then the loans that were given to SHLD can shift to SRG and indeed we see that happening with the 200m loan @ 6.5% to SRG directly.

The only issue with the argument of below market rents moving to market rents is that this opportunity would be available to anyone who decides to start a REIT, close their retail operations and redevelop their properties (e.g. Macy's/Brookfield). The $4/square foot benefit would seem to only occur if Seritage was sold those properties at a valuation that reflected that low price, otherwise with the redevelopment cost (which presumably others will have to pay as well) then everyone is aiming for higher rents...Also the $4/square foot or $150m per year seems such a small amount compared to the 2-3x higher market rent that the real cost is the redevelopment. Let's hope interest rates stay low enough so that construction costs don't skyrocket.

However commercial real estate is a decent inflation hedge and provides current income.
If disinflation is the status quo, concentration costs should be reasonable and if inflation takes hold the asset value should increase but not sure if it will increase faster than the construction costs.

[peridotcapital]

Peridotcalital you were regretting having missed this in the 30s.  Are you buying here?  I guess shld bankruptcy could introduce some unknown unknowns.

Funny you should ask... I began initiating positions yesterday when it dipped below $40. Lots of moving parts to the story that require close observation (obviously), so I am not diving in too aggressively, but with a "3" handle it starts to get interesting (~15x FFO based on signed leases).