SRG - Seritage Growth Properties

[BTShine]

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business.   

It all boils down to if they continue to re-purpose and re-lease this space at 4X current rents.  If they do, this investment will be very profitable.  If they can't find new tennants in size, then the investment will be a big loss in one way or another.

In the May '17 presentation they show that the 38 redevelopments in process will be worth 1.3 Billion when finished.  This value essentially covers SRG's mortgage debt.  From here on out everything else is gravy. 

By SRG's calculations every 1 million square feet of redevelopment creates $160 million of net new value to equity.  An additional $110 million is also retained; this is existing value based upon acquisition value of RE.  The last 4 quarters they've signed 2.4 million sq ft of space.  If they get to 3 million a year, they'll create net new value to equity of $480 million, or about $8.75/share.  They'll also retain $330 million of existing value (think of what value exists w/ SHLD as a tennant) when leasing 3 million sqft. 

Overall, this example of redeveloping 3 million sqft per year means the company will lock in value of $810 million ($480m  + $330m).  If SHLD went bankrupt tomorrow we'd still have the $1.3 Billion of value in place from current redevelopments.   Then every year we'd see $810 million of value locked in, which brings us back to current enterprise value in 3 years.  From there, the company increase in value of $810m per year would give us a 33% return based upon a market cap of $2.2 Billion.

It all boils down to the market demand for this space continuing at it's current pace and price.

I think this company could redevelop and lease all of its 40 million sqft in the next 10 years, which would make shares worth about $200 and that doesn't include the dividends we'd collect along the way. 

[scorpioncapital]

Some nice visuals - http://www.businessinsider.com/this-is-what-sears-stores-will-look-like-in-the-future-2017-5/#a-birds-eye-view-of-the-area-shows-the-120000-square-foot-sears-store-built-in-1965-surrounded-by-a-parking-lot-with-its-former-auto-center-nearby-3

Sears is still a tiny little retailer there. But to be honest, and who knows what Buffett was thinking doesn't this look remarkably similar to what he did as a young kid,

"Buffett started selling Juicy Fruit chewing gum packs. When asked for 1 piece, he would not sell as he thought he may be left with 4 pieces he could not sell. He made 2 cents profit per pack.

Buffett would also purchase Coca-Cola six packs for 25 cents from his grandfather’s grocery store – Buffett and Son. He would sell each Coke for 5 cents. Profit of 5 cents per pack."

Seems these complexes are being divided up like a pizza. Instead of 1 giant Sears piece you now got Sears as one slice of a multi-flavoured pizza...Which makes sense considering nobody wanted the Sears slice but perhaps there are a few oddballs who might want a small slice once in a while
 
The premise of the investment is the success of some retail in general, not necessarily the success or failure of Sears. I still think that other retail operators have more to worry about. Imagine you have a giant supply of retail space and the others who did not have Sears tenants were renting out for $50 or $60 per square foot. I think if you look at the competitors that's the current number for top locations and malls. So if you are a tenant in those areas and you see these new developments for the bargain price of "only $15 per square foot", maybe you'd be tempted to switch or renegotiate lower with your current tenant. That means competitors could be pressured lower in relation to current prices. But this is not going to happen overnight.

[Spekulatius]

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business.   

It all boils down to if they continue to re-purpose and re-lease this space at 4X current rents.  If they do, this investment will be very profitable.  If they can't find new tennants in size, then the investment will be a big loss in one way or another.

In the May '17 presentation they show that the 38 redevelopments in process will be worth 1.3 Billion when finished.  This value essentially covers SRG's mortgage debt.  From here on out everything else is gravy. 

By SRG's calculations every 1 million square feet of redevelopment creates $160 million of net new value to equity.  An additional $110 million is also retained; this is existing value based upon acquisition value of RE.  The last 4 quarters they've signed 2.4 million sq ft of space.  If they get to 3 million a year, they'll create net new value to equity of $480 million, or about $8.75/share.  They'll also retain $330 million of existing value (think of what value exists w/ SHLD as a tennant) when leasing 3 million sqft. 

Overall, this example of redeveloping 3 million sqft per year means the company will lock in value of $810 million ($480m  + $330m).  If SHLD went bankrupt tomorrow we'd still have the $1.3 Billion of value in place from current redevelopments.   Then every year we'd see $810 million of value locked in, which brings us back to current enterprise value in 3 years.  From there, the company increase in value of $810m per year would give us a 33% return based upon a market cap of $2.2 Billion.

It all boils down to the market demand for this space continuing at it's current pace and price.

I think this company could redevelop and lease all of its 40 million sqft in the next 10 years, which would make shares worth about $200 and that doesn't include the dividends we'd collect along the way.

+1 for putting the math on SRG value added developments here in writing.

[LongTermView]

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.

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business.   

Yeah, I think they have several options if the rent from Sears suddenly gets disrupted.

Between December 2015 and March 2017 the SNO Third-Party annualized rent has gone up by $34.3 million but the In-Place Third-Party annualized rent has only gone up by $8.8 million. I'm guessing this is one of the reasons why the timeline given by Mohnish is longer than the one I posted earlier.

[Omm]

Buffett still holds.

How do you know Buffett still holds? Does he have to declare when he sells?

[LongTermView]

Looking at the 2017 q1 earnings call transcripts for Macerich and GGP, it sounds like 100% recaptures are preferred over 50% recaptures.

https://seekingalpha.com/article/4066979-macerichs-mac-ceo-art-coppola-q1-2017-results-earnings-call-transcript?part=single

Art Coppola

I never was looking to do 50% recaptures from any of the Sears stores. It was done in the early phases and I think it was a great move to put Primark in the half or so of the Sears box at Danbury and Freehold and that’s fine, that was a good idea. But honestly, I don’t see the economics makes sense to recapture 50% getting at the other seven locations and effectively pace Sears to them, shrink into the other half of the space. Because A, it costs too much money to do it and B, ultimately you're kicking the can down the road. So if and when Sears does fail, that the opportunity to redeploy the other half, probably doesn’t make a lot of sense. So at this point in time, I really don’t see anything happening on the development front of any of the other seven boxes.



https://seekingalpha.com/article/4067582-ggp-ggp-q1-2017-results-earnings-call-transcript?part=single

Floris van Dijkum - Boenning & Scattergood

Great. Good morning, guys. Question for you on your returns of your redevelopments. Sandeep, did you say that your returns from the Seritage redevelopments are lower than your wholly owned redevelopments?

Sandeep Lakhmi Mathrani - GGP, Inc.

Yes. At this moment in time, it's been and we've maintained – that's been 7%, and the large reason for that is obviously half the space is being leased back to Sears.

[glorysk87]

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

You shouldn't put so much weight on what Mohnish did or said. He has been wrong (very wrong) many times in the past.

[LongTermView]

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

You shouldn't put so much weight on what Mohnish did or said. He has been wrong (very wrong) many times in the past.

That's fair. I'm not saying his timeline is necessarily correct. However, it is something that interests me and I wish he would have been more specific in terms of the details leading up to the conclusion.


[BTShine]

Buffett still holds.

How do you know Buffett still holds? Does he have to declare when he sells?

I believe so.

[koshigoe]

We'd find out through an update to his 13d filing, but he could have sold and we wouldn't know until mid Feb 2018.

Berkowitz has been buying almost every week/day since it's been in low 40s/high 30s. He's on the board of Sears too. It's probably impossible for anyone to predict future when Sears dies, even board members, but if he's buying and ostensibly knows the contingency plans, seems it's a good coattail bet.