SRG - Seritage Growth Properties

[SlowAppreciation]

I'm trying to figure out how long it will take to cover key expenses without relying on Sears.

The 2017 Q1 supplemental shows key expenses for the first quarter:
($ thousands)
  $4,472 Property Operating
$12,422 Real estate taxes
  $6,274 General and administrative
$16,592 Interest expense
---------
$39,760

Annualizing brings the total to about $160 million per year.

The supplemental breaks down Third-Party rent:
Annual     PSF        GLA
Rent
$44,528   $12.97   3,432   In-Place Third-Party

$47,194   $18.21   2,591   SNO Third-Party
---------
$91,722 thousand

The remaining Third-Party rent needed is around $160 million - $92 million or $68 million

The supplemental shows that over the last 4 quarters SRG has leased 2.4 million square feet at an average of $16.06 per sf:
Quarter   GLA     A_Rent    PSF
Q2 2016   422     $7,240   $17.15
Q3 2016   543     $7,470   $13.74
Q4 2016   891   $14,900   $16.72
Q1 2017   535     $8,780   $16.41
             ------   ---------   --------
             2,391   $38,390   $16.06

If they keep going at the same pace then $68 million/$16.06 means they need to lease about another 4.2 million square feet.

If they keep re-leasing 2.4 million sf per year then they'll re-lease another 4.2 million sf within 2 years, right?

Yeah I put them being "home free" from Sears in ~6-8 quarters.

[scorpioncapital]

Yes, but there are some assumptions in that.

-$16.06 is the correct average to use. I think in their documents they show a chart on their ROI and so forth and I estimate it only implies getting $11 or so per square feet. Needless to say this would extend the time frame to freedom from Sears.

-That the leases signed now and shown are actually collected now. I'm not entirely clear but doesn't the revenue they show in the supplement only flow when tenants actually start paying? Are SNO leases signed but not yet paying?

-Interest expense may rise if it's variable. 65 to 100m in interest expense could make some modest difference.

Probably best to build in a margin of safety.

[LongTermView]

Yeah I put them being "home free" from Sears in ~6-8 quarters.

Cool, it's nice to hear what others think about the numbers.

[LongTermView]

Yes, but there are some assumptions in that.

-$16.06 is the correct average to use. I think in their documents they show a chart on their ROI and so forth and I estimate it only implies getting $11 or so per square feet. Needless to say this would extend the time frame to freedom from Sears.

-That the leases signed now and shown are actually collected now. I'm not entirely clear but doesn't the revenue they show in the supplement only flow when tenants actually start paying? Are SNO leases signed but not yet paying?

-Interest expense may rise if it's variable. 65 to 100m in interest expense could make some modest difference.

Probably best to build in a margin of safety.

True, if it ends up being just $11 per sf then that extends the timeframe.

I think you're right about SNO, my understanding is that tenants have signed but not yet opened such that they haven't started paying.

[texual]

I believe these properties would still be required to pay their rent in the event. I'm also certain that the same pockets that would feed SRG would also be invested in preventing the Sears subsidiary from bankruptcy.

[peridotcapital]

I'm trying to figure out how long it will take to cover key expenses without relying on Sears.

The 2017 Q1 supplemental shows key expenses for the first quarter:
($ thousands)
  $4,472 Property Operating
$12,422 Real estate taxes
  $6,274 General and administrative
$16,592 Interest expense
---------
$39,760

Annualizing brings the total to about $160 million per year.

The supplemental breaks down Third-Party rent:
Annual     PSF        GLA
Rent
$44,528   $12.97   3,432   In-Place Third-Party

$47,194   $18.21   2,591   SNO Third-Party
---------
$91,722 thousand

The remaining Third-Party rent needed is around $160 million - $92 million or $68 million

The supplemental shows that over the last 4 quarters SRG has leased 2.4 million square feet at an average of $16.06 per sf:
Quarter   GLA     A_Rent    PSF
Q2 2016   422     $7,240   $17.15
Q3 2016   543     $7,470   $13.74
Q4 2016   891   $14,900   $16.72
Q1 2017   535     $8,780   $16.41
             ------   ---------   --------
             2,391   $38,390   $16.06

If they keep going at the same pace then $68 million/$16.06 means they need to lease about another 4.2 million square feet.

If they keep re-leasing 2.4 million sf per year then they'll re-lease another 4.2 million sf within 2 years, right?

The situation is actually better than that because the rent does not include the reimbursements for taxes and insurance. As a result, your denominator in reality would be higher because the non Sears tenants are paying more than $16/foot.

[LongTermView]

The situation is actually better than that because the rent does not include the reimbursements for taxes and insurance. As a result, your denominator in reality would be higher because the non Sears tenants are paying more than $16/foot.

Does SRG break out Sears reimbursements vs Third-Party reimbursements in any of the filings? In total Tenant reimbursement revenue dropped from $17,778 thousand in 2016 Q1 to $16,224 thousand in 2017 Q1. Is this drop because Third-Party leases are structured differently such that reimbursements are less of a factor?

[BTShine]

When trying to predict SRG's year, and the additional SNO lease revenue they will bring in, it's important to note that the CEO estimates they will see over $60 million in leases or SNO leases from early '17 to early '18. $500 million of capital investment and over 12% unlevered returns on capital.   This means that one year from now he expects us to meet  that $68 million hurdle (or gap) mentioned above.  Therefore, I think the company will be fine barring any major economic catastrophe or drastic changes in SRG's marketplace. 

[LongTermView]

When trying to predict SRG's year, and the additional SNO lease revenue they will bring in, it's important to note that the CEO estimates they will see over $60 million in leases or SNO leases from early '17 to early '18. $500 million of capital investment and over 12% unlevered returns on capital.   This means that one year from now he expects us to meet  that $68 million hurdle (or gap) mentioned above.  Therefore, I think the company will be fine barring any major economic catastrophe or drastic changes in SRG's marketplace.

This is encouraging.

It is hard to reconcile this against what Mohnish Pabrai said in Barron's:

“If Sears doesn’t file until 2020, Seritage is fine,” he says. “It is possible they are fine if there is a late-2019 filing. Any filing before that means taking extraordinary measures.”

I wish Mohnish would have been more specific with the numbers and thoughts behind his timeline estimates.

[scorpioncapital]

I find the argument in general that an investment will be alright if Sears bankrupts in 2019 but a disaster if bankrupts this summer a bit superficial. Perhaps the price will drop alot for srg but I see either a positive outcome either way or a negative one, independent of what happens to Sears or when.