For those that are actively bearish and those that stay away (or are agnostic to SRG) because of some concerns, what are your concerns or reasons to be bearish on SRG?
I'm long but I'm also pragmatic such that I entertain both bullish and bearish thoughts.
Here are some concerns in no particular order:
1. Cash flow reliance on a single tenant. The Q1 2017 supplemental shows that only $44.5 million or 19.3% of the annual rent is from In-Place Third-Party Leases. It's true that SNO Third-Party Leases make up another $47.2 million or 20.4% but signed and opened are two different things. The annual rent from SHLD is $139.4 million or 60.3%.
2. Conflict of interest. Eddie Lampert is the chairman for both SHLD and SRG. One potential example of conflict involves the decision as to whether to do a 50% recapture now at a given property or whether to wait and do a 100% recapture in the future.
As I mentioned on May 29th, Art Coppola from Macerich says that 100% recaptures make the most sense in the
https://seekingalpha.com/article/4066979-macerichs-mac-ceo-art-coppola-q1-2017-results-earnings-call-transcript?part=single transcription:
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.
Based on the above transcription and other information, I'm guessing the economics are often best for SRG with 100% recaptures. I'm guessing the economics are often best for SHLD with 50% recaptures as they bring in fresh tenants which increases foot traffic for the smaller SHLD stores.
3. Dividends. An argument can be made that SRG should not be paying dividends until SHLD is a smaller percentage of revenue. The "must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends" part of
https://www.sec.gov/fast-answers/answersreitshtm.html shouldn't apply as the 2016 loss before taxes was $90,504,000.
Of course we can back out most of the depreciation expense when looking at owner earnings such that there is enough money to pay dividends at this point. Still, it seems like it would be safer to not pay dividends until there is less dependence on SHLD. Some say the decision to pay dividends now is based more on incentives than economics.
