Author Topic: SRG - Seritage Growth Properties  (Read 535536 times)

peridotcapital

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Re: SRG - Seritage Growth Properties
« Reply #220 on: January 13, 2017, 11:45:42 AM »
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?

I think the higher level of interest on this site is just due to SRG being related to the Sears/Eddie Lampert story, which many here find so remarkable/fascinating/shocking/disturbing/etc.

I have owned HHC since 2013 and I would certainly not say that SRG has better assets... I'm not sure anyone would claim that. SRG is easier to analyze because we know exactly what the properties are and they are quite similar. So we take a $15 or $20 average rent, or whatever you want to use, and it's pretty simple to discount back cash flows over 10 or 20 years.

HHC is different because we really don't know what they are going to build in the future. What will HHC's operating asset NOI be in 10 years? Who the heck knows. Sure, some people are assuming they build 1 condo tower a year for a decade in Ward Village (or whatever they plug into their DCF model), but the degree of confidence in that sort of guesswork is probably quite low given the outside factors that will influence build-out plans.

But I guess your main question is, if HHC has better assets, a great balance sheet, and what appears to be a solid management team, why even bother with SRG if you are interested in long-term real estate development stories? To me, it's the valuation. I might be willing to pay up a little for HHC's assets, but at the right price, SRG might look attractive too even if the assets are worse. It's all about what you are getting and what price you paying, right?

SRG: $2.2B equity/$3.3B E/V

HHC: $4.3B equity/$5.9B E/V

Including signed leases, Seritage's annualized FFO  is pushing $150M.

Howard Hughes is projecting 2019 NOI of $220M ex-SSSP. Let's call it $300M all-in. You would get roughly the same FFO ($150M) in 2019 using current interest and G&A run-rates.

So there's a clear valuation gap between the two. I would argue that is due to the asset quality differential. So at current stock prices, SRG might outperform even with less desirable assets.


KJP

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Re: SRG - Seritage Growth Properties
« Reply #221 on: January 13, 2017, 01:15:24 PM »

 SRG is easier to analyze because we know exactly what the properties are and they are quite similar. So we take a $15 or $20 average rent, or whatever you want to use, and it's pretty simple to discount back cash flows over 10 or 20 years.

HHC is different because we really don't know what they are going to build in the future. What will HHC's operating asset NOI be in 10 years? Who the heck knows. Sure, some people are assuming they build 1 condo tower a year for a decade in Ward Village (or whatever they plug into their DCF model), but the degree of confidence in that sort of guesswork is probably quite low given the outside factors that will influence build-out plans.

But I guess your main question is, if HHC has better assets, a great balance sheet, and what appears to be a solid management team, why even bother with SRG if you are interested in long-term real estate development stories? To me, it's the valuation. I might be willing to pay up a little for HHC's assets, but at the right price, SRG might look attractive too even if the assets are worse. It's all about what you are getting and what price you paying, right?

SRG: $2.2B equity/$3.3B E/V

HHC: $4.3B equity/$5.9B E/V

Including signed leases, Seritage's annualized FFO  is pushing $150M.

Howard Hughes is projecting 2019 NOI of $220M ex-SSSP. Let's call it $300M all-in. You would get roughly the same FFO ($150M) in 2019 using current interest and G&A run-rates.

So there's a clear valuation gap between the two. I would argue that is due to the asset quality differential. So at current stock prices, SRG might outperform even with less desirable assets.

That's fair.  I'm just less sanguine about the SRG/Sears assets.

Your HHC numbers don't include cash margin on land/condo sales, right?  I realize those are very difficult to predict the timing of. 

peridotcapital

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Re: SRG - Seritage Growth Properties
« Reply #222 on: January 13, 2017, 01:40:01 PM »

That's fair.  I'm just less sanguine about the SRG/Sears assets.

Your HHC numbers don't include cash margin on land/condo sales, right?  I realize those are very difficult to predict the timing of.

Correct, I excluded the net proceeds from one-time property sales. That money will obviously help fund development in the sense that debt financing requirements will be lower, which should hold interest expenses in check. But the more detailed way of valuing it would be to separate the operating properties (FFO multiple) and the undeveloped land (DCF) and sum the two.

It might seem like apples to oranges to ignore it in my post, but SRG also has a lot of embedded real estate value that is not included in the FFO figure I used (below market leases on Sears locations they continue to use).

KJP

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Re: SRG - Seritage Growth Properties
« Reply #223 on: January 13, 2017, 02:48:48 PM »

That's fair.  I'm just less sanguine about the SRG/Sears assets.

Your HHC numbers don't include cash margin on land/condo sales, right?  I realize those are very difficult to predict the timing of.

Correct, I excluded the net proceeds from one-time property sales. That money will obviously help fund development in the sense that debt financing requirements will be lower, which should hold interest expenses in check. But the more detailed way of valuing it would be to separate the operating properties (FFO multiple) and the undeveloped land (DCF) and sum the two.

It might seem like apples to oranges to ignore it in my post, but SRG also has a lot of embedded real estate value that is not included in the FFO figure I used (below market leases on Sears locations they continue to use).

You've clearly been paying attention to HHC, so perhaps there are many others like you that have analyzed it/are following it and it just doesn't generate the same number of posts on this board that SRG/SHLD do because of all the hubbub surrounding Sears. 

For newcomers to the area who are interested in long-term real estate development stories, though, I would encourage them to look at both.  I would also throw in Dream Unlimited for the Canadian crowd, but that's even more of a grabbag than HHC. 

koshigoe

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Re: SRG - Seritage Growth Properties
« Reply #224 on: January 13, 2017, 04:47:40 PM »
anybody thinking there might be short squeeze coming up with low valuation and 28% of shares short? It is one of most shorted stocks on NYSE, and with small float could move up quickly like last spring. lots of value hands in this however low it goes...

http://www.wsj.com/mdc/public/page/2_3062-nyseshort-highlites.html

cmlber

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Re: SRG - Seritage Growth Properties
« Reply #225 on: January 13, 2017, 06:14:50 PM »
anybody thinking there might be short squeeze coming up with low valuation and 28% of shares short? It is one of most shorted stocks on NYSE, and with small float could move up quickly like last spring. lots of value hands in this however low it goes...

http://www.wsj.com/mdc/public/page/2_3062-nyseshort-highlites.html

Cost to borrow SHLD is like 65%, so it's being used as a cheaper way to short SHLD I guess. 

I have two problems with this one, 1) the fraudulent conveyance risk seems pretty high to me, given that the long thesis is essentially "the assets SHLD transferred to SRG are worth way more than the price paid" and 2) 10-20 years from now, who is going to use all of the empty boxes left by Sears, Macys, Dillards, JC Penney, etc.?  On a relative basis, it looks pretty cheap, but would anyone long SRG actually consider buying REIT comps?

dutchman

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Re: SRG - Seritage Growth Properties
« Reply #226 on: January 14, 2017, 07:22:48 AM »
Thanks for your reply peridot.   Looks like Berkowitz bought another 140k shares fwiw.

HalfMeasure

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Re: SRG - Seritage Growth Properties
« Reply #227 on: January 14, 2017, 01:05:45 PM »
anybody thinking there might be short squeeze coming up with low valuation and 28% of shares short? It is one of most shorted stocks on NYSE, and with small float could move up quickly like last spring. lots of value hands in this however low it goes...

http://www.wsj.com/mdc/public/page/2_3062-nyseshort-highlites.html

Cost to borrow SHLD is like 65%, so it's being used as a cheaper way to short SHLD I guess. 

I have two problems with this one, 1) the fraudulent conveyance risk seems pretty high to me, given that the long thesis is essentially "the assets SHLD transferred to SRG are worth way more than the price paid" and 2) 10-20 years from now, who is going to use all of the empty boxes left by Sears, Macys, Dillards, JC Penney, etc.?  On a relative basis, it looks pretty cheap, but would anyone long SRG actually consider buying REIT comps?

1) Is fraudulent conveyance risk still in play if they lap the 2 year anniversary on the rights offering without a significant credit event?

2) This is the thematic issue that bothers me, however a mitigating factor is that there is always going to be a use for centralize real estate the question is just what the economics will be on whatever ends up being the first and best use 10 years from now. Worst case scenario, some of the boxes turn into warehouses, distribution centers, etc, right? It's not like the downside is them being left empty, the downside is now getting a $20-40/sqft tenant, but perhaps you can balance the economics by spending less on redevelopment. Would be interested to hear other's thoughts on this though as it is a big overhang with the amount of real estate that might come on the market if traditional retail continues to falter.


gfp

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Re: SRG - Seritage Growth Properties
« Reply #229 on: January 15, 2017, 07:50:19 AM »