SRG - Seritage Growth Properties

[Foreign Tuffett]

The funny thing about SRG is that most people that speak publicly on the company are focusing on the risk of income from SHLD going to zero.  Well, in my opinion that's a variable that's only worth $500 million of the SRG value at this point.  Call it income from SHLD of $150m this year, $120 next, then $95, etc.  the present value of that might be approximated at $500m.

Well, the enterprise value of SRG is around $4 billion.  Therefore $500 million shouldn't be the deciding factor in an investment with a value of $ 4 billion.

The other variable is 'what's the reinvestment (redevelopment) opportunity worth?'  I won't lay out my answer for that here, but I think that's where one should be looking when trying to decide if SRG is a good investment at an enterprise value of $4 billion

I think trying to isolate or unbundle the SHLD rent payments as a percentage of SRG's enterprise value isn't the ideal way to look at the situation.

Here's the way I'm thinking about SRG's SHLD tenant risk: I don't think anyone really knows what SHLD's remaining assets are worth, or when/how/if they will be monetized. However, Lampert has EVERY incentive to keep SHLD out of bankruptcy, or at least to stave it off as long as possible. If SHLD goes bankrupt not only will he likely lose his entire SHLD equity investment, but his SRG, SHOS, and LE equity positions will also be impaired. Lampert's ability to run a large retailer is very, very questionable, but he has proven adept at navigating the capital markets. He has also shown a willingness to put more of his own personal wealth on the line.

It is in SRG's best interest for all or almost all Sears and Kmart stores to eventually disappear from the face of the earth. I think it's all but inevitable that this happens. It's a question of timing.

[spark411]

Thanks all for the response. Very interesting and helpful.

I think if SHLD goes bankrupt, SRG still holds the value in the buildings/land.   If there is a cash crunch, SRG has the option to sell the buildings/land.   If there is really an oppty to increase rents 3-4x, there will be other buyers.

I think a key question is whether SRG is cherry picking the assets in the early years.  Does SRG really have 3-4x the rent potential of the SHLD tenanted properties OR does the first 1/3 of the assets have the 3-4x potential.   

Thanks

[RadMan24]

Pabrai indicated that SRG would need additional fundraising - which should be attainable, in the tune of $1 billion. See Berkshire investment in STOR.

He also believes there may be another chance to take a bite of the apple at much lower prices (dilution/sears fears develop). Which is why it's probably smart to wait and see what happens, rather than build up at these levels.

Flip side is, if sears makes it 2-3 years (say 2), the value of the company will be tremendous.

[BTShine]

Is anyone interested in laying out how things will look for SRG if SHLD lasts 2+ years instead of going BK in 2 years or less?  How will Hoss these two different outcomes change things for SRG? 

Thanks!

[LongTermView]

Is anyone interested in laying out how things will look for SRG if SHLD lasts 2+ years instead of going BK in 2 years or less?  How will Hoss two different outcomes change things for SRG? 

Thanks!

Among other things, I think the options with the joint ventures would be different.

As noted earlier in the thread, SRG said this in July:

sold to GGP the Company’s 50% interest in eight of the 12 assets in the existing joint venture between the two companies for $190.1 million

If SHLD goes bankrupt in 2 years or less then I think SRG needs to raise cash right away and sell their interest in the other 4 GGP JV assets along with their interest in the Simon and Macerich JV assets as fast as possible.

If SHLD lasts 2+ years then maybe SRG can be more strategic with these joint ventures. Maybe they sell them all within 2 years either way but I think they have more flexibility with the timing if SHLD is not BK.

[Greyhound]

Is anyone interested in laying out how things will look for SRG if SHLD lasts 2+ years instead of going BK in 2 years or less?  How will Hoss two different outcomes change things for SRG? 

Thanks!

There's all this talk about sears going bankrupt. Their FY 16/17 $20.78 EPS loss certainly doesn't help and headlines that proclaim to know the future.

But for a moment, just think. What if they are able to right size itself to breakeven and profitability? Just keep in mind that EBITDA in the latest quarter was "only" ($62)m, which suggest, on an adj EBITDA basis, that SHLD could be on a path to breaking even.

[Foreign Tuffett]

Is anyone interested in laying out how things will look for SRG if SHLD lasts 2+ years instead of going BK in 2 years or less?  How will Hoss two different outcomes change things for SRG? 

Thanks!

Among other things, I think the options with the joint ventures would be different.

As noted earlier in the thread, SRG said this in July:

sold to GGP the Company’s 50% interest in eight of the 12 assets in the existing joint venture between the two companies for $190.1 million

If SHLD goes bankrupt in 2 years or less then I think SRG needs to raise cash right away and sell their interest in the other 4 GGP JV assets along with their interest in the Simon and Macerich JV assets as fast as possible.

If SHLD lasts 2+ years then maybe SRG can be more strategic with these joint ventures. Maybe they sell them all within 2 years either way but I think they have more flexibility with the timing if SHLD is not BK.

How much longer SRG needs SHLD to keep paying rent is dependent on the rate at which properties are transitioned to 3rd party tenants. I think two years will probably be long enough to get them past the "major liquidity crunch if SHLD is no longer able to pay" stage.

Keep in mind that SHLD going bankrupt doesn't necessarily mean that it won't keep paying rent under the master lease. From the 2016 10K:

Sears Holdings leases a substantial majority of our properties. Bankruptcy laws afford certain protections to tenants that may also affect the Master Lease or JV Master Leases.  Subject to certain restrictions, a tenant under a master lease generally is required to assume or reject the master lease as a whole, rather than making the decision on a property-by-property basis.  This prevents the tenant from assuming only the better performing properties and terminating the master lease with respect to the poorer performing properties. While we believe that our Master Lease and JV Master Lease are unitary leases that would need to be assumed or rejected as a whole in any bankruptcy proceeding, whether or not a bankruptcy court would require that a master lease be assumed or rejected as a whole depends upon a “facts and circumstances” analysis considering a number of factors, including the parties’ intent, the nature and purpose of the relevant documents, whether there was separate and distinct consideration for each property included in the master lease, the provisions contained in the relevant documents and applicable state law.  If a bankruptcy court in a Sears Holdings bankruptcy were to allow the Master Lease or a JV Master Lease to be rejected in part, certain underperforming leases related to properties we or the applicable JV as landlord under a JV Master Lease, respectively, own could be rejected by the tenant in bankruptcy while tenant-favorable leases are allowed to remain in place, thereby adversely affecting payments to us derived from the properties.  For this and other reasons, a Sears Holdings bankruptcy could materially and adversely affect us.

[tooskinneejs]

Are Sears' leases of Seritage properties assignable by Sears to other parties in the event of bankruptcy?  And if they are, would that be a potential negative for Seritage if the assignee could continue to pay below-market rents for a long-term period?

[Greyhound]

Doesnt seem like assignments arent permitted except in permitted situations:

ARTICLE IX
TRANSFER
9.1 Transfer; Subletting and Assignment. Except as otherwise expressly provided herein (including, without limitation, Article XV), Tenant shall not, without Landlord’s prior written consent (which consent may be withheld in Landlord’s sole and absolute discretion) Transfer this Master Lease or the Demised Premises, or any rights of Tenant or any interest of Tenant therein, including any subletting of part or all or any part of the Demised Premises, or engage the services of any Person (other than an Affiliate of Tenant) for the management or operation of any Demised Premises (as to which management services Landlord’s consent shall not be unreasonably withheld, conditioned or delayed. Any assignment or Transfer of any rights or interests in violation of this Article IX is ipso facto null and void and of no force or effect. Tenant acknowledges and agrees that the foregoing restrictions on Tenant’s rights of Transfer are consistent with and integral to the protection and implementation of Landlord’s rights to the Recapture Space and Additional Recapture Space and that the Rent and the other terms and conditions of this Master Lease have been expressly negotiated based upon and taking into account the foregoing restrictions on Tenant’s rights of Transfer, and that Landlord is relying upon the expertise of Tenant in the operation of each Store and that Landlord entered into this Master Lease with the expectation that Tenant would remain in and operate each Store during the entire Term (except for such express rights of termination by Tenant, or recapture or buy-out by Landlord, or limited rights of Tenant, as set forth herein) and for those reasons, among others, except as set forth herein, Landlord retains sole and absolute discretion in approving or disapproving any assignment or sublease or other Transfer not expressly permitted hereunder. Tenant acknowledges and agrees that the foregoing restrictions on Transfer are reasonable and have been specifically negotiated and bargained for between the parties and are an essential part of the economics of this Master Lease, and are a material inducement to Landlord to enter into this Master Lease.


9.2 Permitted Subletting. Tenant shall not have any right to lease, sublease, license or otherwise permit the use or occupancy of any space on or within any Property, except for: (a) the Lands’ End Agreements; (b) the Sears Hometown License Agreement; and (c) leases, licenses, concessions or in-store department agreements with third-party retailers, concessionaires, tenants or licensees that (i) operate wholly within or as part of Tenant’s Store with respect to any Demised Premises (except for storage or parking of vehicles in connection with vehicle rentals), do not operate separate or apart from the operations of the applicable Kmart Stores and/or Sears Stores, do not violate or conflict with any Encumbrance or any use restrictions and/or exclusives which affect the Demised Premises as of the time of the Commencement Date and which are generally consistent with historical practices at the Stores or otherwise consistent with the permitted uses of Section 7.2 (the leases, licenses, concessions and other agreements in clauses (a), (b) and (c), individually, a “Sublease,” and collectively, the “Subleases”); provided that in the case of the Subleases described in part (c) of this sentence, (i) (x) Tenant shall use commercially reasonable efforts to give Notice to Landlord of each new Sublease executed after the Commencement Date within thirty (30) days of the execution thereof and prior to the commencement of occupancy by the sublessee; provided, however, Tenant shall not be in breach or default of the foregoing obligation to provide Notices of Subleases if it provides a list of Subleases entered into since the last Notice to Landlord within fifteen (15) days of Landlord’s written request therefor given not more frequently than once in any calendar quarter during the Term, and (y) Tenant shall give Notice to Landlord of each new Sublease to the extent not previously provided, as part of the quarterly reports provided in Section 21.24(a) to the extent of the actual knowledge of such Subleases by the person preparing and signing such quarterly report, and (ii) such Sublease shall be expressly subject to the rights of any other Leases existing as of the Commencement Date which were entered into prior to the execution of such Sublease and to other Encumbrances affecting the Property as of the date such Sublease is entered into. For the purposes of this Section 9.2 only, “Encumbrance” shall include any Landlord Mortgage solely with respect to the lien thereof.

9.3 Permitted Assignments. Notwithstanding the foregoing, Tenant may, without Landlord’s prior written consent: (a) assign this Master Lease to Tenant’s Parent or any Subsidiary thereof; or (b) assign or transfer all of its rights and obligations under the Master Lease (either directly or indirectly, by operation of law or through a merger or other corporate transaction) to any other solvent corporation, partnership, limited liability company or other legal entity that (1) acquires all or substantially all of the assets of Tenant’s Parent, (2) is the surviving entity of a merger with Tenant’s Parent, or (3) results from a consolidation, reorganization or
recapitalization of Tenant’s Parent with a solvent corporation, partnership or other legal entity, in each case of subclauses (1), (2) and (3), provided the surviving entity has a net worth of not less than the net worth of Tenant’s Parent as of immediately prior such merger or other corporate transaction, after giving effect to any financing provided or contemplated in such merger or corporate transaction; provided, that in each case the successor tenant or successor Tenant Party (if not the named Tenant herein, the “Unrelated Successor Tenant”) assumes all of such Tenant’s obligations under the Master Lease (except that any such Unrelated Successor Tenant shall not be required to operate a “Sears” or “Kmart” Store, but shall otherwise comply with all of the provisions of Sections 7.2 and 7.3). In the case of any such assignment, (x) each Lease Guarantor (or the successor to each Lease Guarantor) shall reaffirm the Lease Guaranty (if it is not the successor to Tenant under the Master Lease) in a written instrument for the express benefit of Landlord in form and content reasonably satisfactory to Landlord and Landlord shall receive a fully executed copy thereof, (y) the use of the Demised Premises, except as expressly set forth above, shall continue to comply with the requirements of this Master Lease, including without limitation all rights of Landlord and all obligations of Tenant with respect to the Recapture Space, Additional Recapture Space and the 100% Recapture Property and (z) with respect to subdivision (b) above, if the identity and creditworthiness of the successor tenant and successor Lease Guarantor shall be subject to the reasonable approval of Landlord and Landlord Mortgagee.


Source: Page 68 and 69 https://www.sec.gov/Archives/edgar/data/1628063/000119312515250446/d17110dex103.htm

[beaufort]

Updated presentation for Sept 2017:  http://ir.seritage.com/Presentations