SRG - Seritage Growth Properties

[LongTermView]

We know Seritage sold their 50% interest in 8 of the 12 original GGP JVs for $190.1 million in July.

Foreign Tuffett noted that in the spring of '18 Seritage has the right to sell their interest in the other original JVs:

I expect that we'll see SRG monetize more of its JVs in the future, and suspect that this was the plan all along. Here's a quote from SRG's S-11 filing:

"at any time after March 31, 2018 in the case of the GGP JV, April 13, 2018, in the case of the Simon JV, and April 30, 2018 in the case of the Macerich JV we will have the right to cause GGP to purchase from the GGP JV, Simon to purchase from the Simon JV, or Macerich to purchase from the Macerich JV, as applicable, any JV Property owned by the applicable JV with respect to which a certain third party leasing threshold has been satisfied at the fair market value of the property, less certain mortgage loans and other debt in respect of such property and certain selling expenses."

If they sell in the spring of '18 and we assume valuations are similar to today then about how much can they get for their 50% interest in the other 4 original GGP JVs, the 10 Simon JVs and the 9 Macerich JVs? How quickly could they be sold once we're past the spring '18 dates?

[Foreign Tuffett]

We know Seritage sold their 50% interest in 8 of the 12 original GGP JVs for $190.1 million in July.

Foreign Tuffett noted that in the spring of '18 Seritage has the right to sell their interest in the other original JVs:

I expect that we'll see SRG monetize more of its JVs in the future, and suspect that this was the plan all along. Here's a quote from SRG's S-11 filing:

"at any time after March 31, 2018 in the case of the GGP JV, April 13, 2018, in the case of the Simon JV, and April 30, 2018 in the case of the Macerich JV we will have the right to cause GGP to purchase from the GGP JV, Simon to purchase from the Simon JV, or Macerich to purchase from the Macerich JV, as applicable, any JV Property owned by the applicable JV with respect to which a certain third party leasing threshold has been satisfied at the fair market value of the property, less certain mortgage loans and other debt in respect of such property and certain selling expenses."

If they sell in the spring of '18 and we assume valuations are similar to today then about how much can they get for their 50% interest in the other 4 original GGP JVs, the 10 Simon JVs and the 9 Macerich JVs? How quickly could they be sold once we're past the spring '18 dates?

I don't think SRG is going to be able to force Simon and Macerich to sell in the near term due to the clause I highlighted. 

[sleepydragon]

I've spent a healthy chunk of time analyzing this and have taken a position.

By my best and most conservative estimates, Sears would have to both declare bankruptcy and reject all of the leases in the portfolio within the next 6 to 8 quarters in order to put Seritage in a bad situation. And even then, as long as SRG could access external financing at a reasonable rate of funding, they should be able to survive without too much trouble.  Beyond 8 quarters, the company should be able to generate positive cash flow even if Sears suddenly disappears off the face of the Earth - the one large assumption here is that they're able to continue to recapture and redevelop properties at the same rate that they have been for the last few quarters.  If that suddenly drastically slows then it's a different story.  So that's the downside scenario.

The upside is massive, and I think will happen more quickly than most people expect. A complete turnover of the portfolio (meaning Sears completely gone and new tenants brought in) gets me a price target of ~$224 using an FFO model and $204 using an NAV model.  By my estimates this should take somewhere around 15 years, giving us an annual return of ~11%.  This doesn't take into account any rental inflation, any growth in the portfolio, or really any other sort of excess return that could be generated by the management team.  This is a pure, steady-state portfolio turnover.  So I think there's probably upside even to my estimates.

For anyone who is concerned about the near term Sears bankruptcy risk, it is somewhat cost effective to hedge a position in SRG by buying long-dated SHLD puts.  The Jan '18 expiration covers most of the risk, as by my estimates the risk should be greatly diminished past that point and an investment should no longer need a SHLD hedge after that date.

I think a fully redeveloped share value in the $200 range that you put out there is entirely reasonable. The 15-year timeframe might be optimistic. Getting there would require both Sears and Kmart to be completely gone by then, and it would imply a redevelopment pace of roughly 2.4 million square feet per year (about 2.5 times their current run-rate). Given the secular trends in bricks and mortar retail (we have too many stores already), I think that is much more of a challenge than dealing with the Sears solvency risks. That said, it's pretty easy to see why Buffett liked this at $36 per share.

Would it be possible the WEB actually bought Sears instead of SRG, and got his SRG from the spinoff? And therefore as a result, he got caught reporting the form 4 which otherwise he won't have to.

[gfp]

Would it be possible the WEB actually bought Sears instead of SRG, and got his SRG from the spinoff? And therefore as a result, he got caught reporting the form 4 which otherwise he won't have to.

I don't think that is the case.  He would have filed his 13d much earlier than December 2015.  The filing seems to indicate he crossed into reporting territory on November 30th 2015.

Also his shareholding is a very round number, exactly 2 million shares, which seems like he bought them as SRG shares.  It is possible that he held SHLD, received SRG shares, then topped up his SRG shares in the open market to above 5% and stopped at an even number of shares.

https://www.sec.gov/Archives/edgar/data/315090/000119312515399523/d103925dsc13g.htm

[sleepydragon]

Would it be possible the WEB actually bought Sears instead of SRG, and got his SRG from the spinoff? And therefore as a result, he got caught reporting the form 4 which otherwise he won't have to.

I don't think that is the case.  He would have filed his 13d much earlier than December 2015.  The filing seems to indicate he crossed into reporting territory on November 30th 2015.

Also his shareholding is a very round number, exactly 2 million shares, which seems like he bought them as SRG shares.  It is possible that he held SHLD, received SRG shares, then topped up his SRG shares in the open market to above 5% and stopped at an even number of shares.

https://www.sec.gov/Archives/edgar/data/315090/000119312515399523/d103925dsc13g.htm

The 2 million round number is a good point! Thanks!

[LongTermView]

I don't think SRG is going to be able to force Simon and Macerich to sell in the near term due to the clause I highlighted.

Yeah, I guess it can't be forced for some time due to the thrid party leasing threshold.

On another note, AMC Theatres to join SRG redevelopment property at Orland Square in Orland Park, Illinois: http://ir.seritage.com/file/Index?KeyFile=390750171

[beaufort]

Re SRG Mortgage Loans Payable from page 41 of the following 2016 annual report:  http://www.snl.com/Cache/c38312861.html
On July 7, 2015, pursuant to the Transaction, the Company entered into a mortgage loan agreement (the “Mortgage Loan Agreement”) and mezzanine loan agreement (collectively, the “Loan Agreements”) providing for term loans in an initial principal amount of approximately $1,161 million (collectively, the “Mortgage Loans”) and a $100 million future funding facility (the “Future Funding Facility”), which we expect to be available to us to finance the redevelopment of properties in our portfolio from time to time, subject to satisfaction of certain conditions.  As of December 31, 2016, the total principal amounts outstanding under the Mortgage Loans and the Future Funding Facility were $1,161 million and $20 million, respectively, and $80 million remained available under the Future Funding Facility for future draws by the Company.
Interest under the Mortgage Loans and Future Funding Facility is due and payable on the payment dates, and all outstanding principal amounts are due when the loans mature on the payment date in July 2019, pursuant to the Loan Agreements.  The Company has two one-year extension options subject to the payment of an extension fee and satisfaction of certain other conditions.  Borrowings under the Mortgage Loans and Future Funding Facility bear interest at the London Interbank Offered Rates (“LIBOR”) plus, as of December 31, 2016, a weighted-average spread of 465 basis points; payments are made monthly on an interest-only basis.  The weighted-average interest rate for the Mortgage Loans and Future Funding Facility for the year ended December 31, 2016 was 5.24%.  For the period from July 7, 2015 (Date Operations Commenced) through December 31, 2015, the weighted-average interest rate for the Mortgage Loans was 4.96%.

The Loan Agreements contain a yield maintenance provision for the early extinguishment of the debt before March 9, 2018. 

Given SRG's ability to refinance without penalty by March 9, 2018 and the fact that there will have been, ballpark, $1.5B in value creation according SRG, why wouldn't SRG be able to refinance the mortgage or issue bonds on more favourable financial terms to both cover redevelopment if SHLD rejects the master lease in a formal BK (and no other bidder comes along)and pay maintenance capex.

Page 6 of the RBC initiation report dated Sept 6, 2016 says the loan becomes due in July 2019, but is prepayable in January 2018. 

Page 7, 2017 SRG presentation:  http://ir.seritage.com/Cache/1001227621.PDF?O=PDF&T=&Y=&D=&FID=1001227621&iid=4584761

In this way, I think SRG doesn't need SHLD to survive for as long as has been previously suggested. 

[dyow]

Buffett couldn't buy sears even if he wanted to.  It would confuse his followers. 

[LongTermView]

https://seekingalpha.com/article/4117650-simon-property-group-spg-q3-2017-results-earnings-call-transcript?part=single

[David Simon] As you know, we did own Seritage stock, we did sell that.

[WneverLOSE]

Seritage has 2$ per share of FFO and they pay 1$ per share in dividends.
My question is why ?

I know that they must pay 90% of taxable income to qualify as a REIT but SRG has net loss and they could use the money to diversify away from sears much quicker...