SRG - Seritage Growth Properties

[peridotcapital]

It is not higher math:

37 mil x $25/sq ft = 925

925 / 0.06 = 15416

but thats equity, not enterprise value.

if solid REIT makes 925 mil a year the equity won't trade at 15416 - 4 or 5 B debt = 10 or 11 B...that's 10% cap rate. edit: this is too aggressive, knock off some 20% for op costs, etc...but you're still something in the ballpark of 10-13 B equity (14-17 B enterprise) in a decade.

so with just reasonable assumptions, SRG could quite easily be a 5x in 10 years. and this doesn't include the sure to be increasing dividends over that time frame.

edit: also wanted to comment on Kimco, that company is loaded with debt, which will only serve to handcuff them in the future with opportunities and redev. SRG doesn't have this legacy baggage, like tie ups with Albertsons and lots of debt. THey've got a clean sheet, and I think that is a nontrivial advantage when competing with these legacy REITS. In fact, Schall even mentioned so in the annual letter, that one of SRG competitive advantage lay in having a clean sheet to work with at properties.

Please show us a public retail REIT comp for SRG that trades at an EV/revenue multiple of 16.75x (the midpoint of your range). It makes no sense to me.

[koshigoe]

It is not higher math:

37 mil x $25/sq ft = 925

925 / 0.06 = 15416

but thats equity, not enterprise value.

if solid REIT makes 925 mil a year the equity won't trade at 15416 - 4 or 5 B debt = 10 or 11 B...that's 10% cap rate. edit: this is too aggressive, knock off some 20% for op costs, etc...but you're still something in the ballpark of 10-13 B equity (14-17 B enterprise) in a decade.

so with just reasonable assumptions, SRG could quite easily be a 5x in 10 years. and this doesn't include the sure to be increasing dividends over that time frame.

edit: also wanted to comment on Kimco, that company is loaded with debt, which will only serve to handcuff them in the future with opportunities and redev. SRG doesn't have this legacy baggage, like tie ups with Albertsons and lots of debt. THey've got a clean sheet, and I think that is a nontrivial advantage when competing with these legacy REITS. In fact, Schall even mentioned so in the annual letter, that one of SRG competitive advantage lay in having a clean sheet to work with at properties.

Please show us a public retail REIT comp for SRG that trades at an EV/revenue multiple of 16.75x (the midpoint of your range). It makes no sense to me.

If one goes back as recently as January of 2017, nowhere near the recent past heyday of REIT values, GGP, SPG both traded around 15-16 EV/rev. Granted that's not a relative trough number like today's 11-12, but for SRG it's in the realm of possibility once their property is redeveloped.

Even Kimco was 12.6 as recently as last summer, again not even close to its peak of the last 5 years, which was somewhere in the high teens EV/rev.

You factor in Aventura, Overlake, Hicksville, LaJolla, Valley View and others will be fully complete in 10 years, and you get a company on the order of GGP, SPG, not Kimco.

But hey, let's chop off 30%, say a fair EV/rev is 12 like a slightly undervalued kimco, you still get an EV of 11B for SRG in 2028. Lop off 4 B in debt that's 7B+ equity.  That's a 3.5 bagger not including divs in 10 years, which should be somewhere around 14% + let's say 3 for the div or 17% CAGR. This is assuming management's plan (could it be conservative?) of $25/sq foot bears out.

If it doesn't and things go to hell maybe stuck at $17 a square foot in ten years on 37 mil , you get 10-15% CAGR, something like that.  But that would be one strange world with 0 inflation in 10 years and a totally mismanaged SRG.

[BG2008]

Toys R US has 35mm US square feet. 

https://www.wsj.com/articles/toys-r-us-tells-workers-it-will-likely-close-all-u-s-stores-1521060803

[GCA]

37 mil x $17 = 629

629 / 0.06 = 10,483

2 to 10.4 in 10 years is ~18%

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

[Foreign Tuffett]

37 mil x $17 = 629

629 / 0.06 = 10,483

2 to 10.4 in 10 years is ~18%

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

Yes and no. Longer lead times mean that many of SRG's best properties and largest developments either haven't been begun and/or don't have SNO leases yet. You are right though, that many of SRG's worst properties, including many SHLD lease termination properties, are empty. Some of them will probably remain empty for an extended period. I don't think anyone knows what the rent per sq foot # will be in 5 or 10 years. Nor does anyone know how many sq feet of space SRG will own years from now. Over time, I would expect that some properties will probably be sold off to opportunistic local developers. Ditto for the JV properties. This will likely be somewhat offset by the "densification" of some of the higher quality properties.

IMO SRG's properties are worth significantly more than the current EV. The big questions are how much money can SRG raise? And on what terms? And how long will SHLD and the master lease last?

[GCA]

Yes, some of the best properties are not yet in this "projects" figure.  However, the average value of a property where a project has been done was $21MM in 2015 before the project.  The average value of a property where no project was undertaken was $8.7MM in 2015. 
The properties with no projects as yet are worth a lot less.  Thus you should expect they will have a lot less rent if they ever are redeveloped.
(Yes, these are per property values but I doubt it would change much if I took the trouble to do it by square foot).

[koshigoe]

37 mil x $17 = 629

629 / 0.06 = 10,483

2 to 10.4 in 10 years is ~18%

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

It seems that if anything 17 is much lower than what we should expect. Not sure what you mean by they have overwhelmingly done projects on higher value projects. None of their premier properties have been leased out yet, and many of the projects already completed are quite representative of remaining real estate. This question has been raised many times, so much so that Ben Schall answered it in the 2016 annual report.

"Brian and I often get asked whether our initial redevelopment activity was “cherry picked” in some form or
fashion; in fact, it’s quite the opposite. This first set of projects is very much representative of the breadth of our
opportunities to create outsized value across our portfolio."

And just to really stir things up, they expect 25 a square foot, not 17

[GCA]

37 mil x $17 = 629

629 / 0.06 = 10,483

2 to 10.4 in 10 years is ~18%

if takes 10 years to do it, that's 18% CAGR, if it takes more, worse cap rate, etc that's lets say 15% a year. But, SRG predicts average $25 square foot when stabilized, so worst case is 15-18 CAGR, better case...20+?

I think it is very dangerous to assume that SRG gets $17 a foot on all their real estate.  Yes, that is what they are expecting on all the projects they have done to date.  However, they have overwhelmingly done projects on higher value properties, in higher value areas (as you would expect).  When they do redevelopment projects on lower value properties they will not be expecting $17 a sqft.

It seems that if anything 17 is much lower than what we should expect. Not sure what you mean by they have overwhelmingly done projects on higher value projects. None of their premier properties have been leased out yet, and many of the projects already completed are quite representative of remaining real estate. This question has been raised many times, so much so that Ben Schall answered it in the 2016 annual report.

"Brian and I often get asked whether our initial redevelopment activity was “cherry picked” in some form or
fashion; in fact, it’s quite the opposite. This first set of projects is very much representative of the breadth of our
opportunities to create outsized value across our portfolio."

And just to really stir things up, they expect 25 a square foot, not 17

What I mean by "they have overwhelmingly done projects on higher value properties" is that there are 32 wholly owned properties which have done "100% recapture" projects and 198 that haven't.  Here I am looking at the list of individual projects which appears in the supplement, etc.  According to the July 2017 CMBS document, which has property by property appraisals, the average value per square foot on properties with a 100% recapture project is $130 psf, the average value per square foot on the other properties is $56.  No conjecture or assumptions from me here, just facts.  Note that there are some high-value properties like Valley View ($91 psf) and Boca Raton ($152) which do not yet appear on the "projects" list, but the list does now include other high value properties like Aventura ($735 psf) and San Diego ($245).

You're right on the 25, my bad.  Still, according to the list of projects and CMBS valuations, they've done projects on properties with a higher value per square foot than the rest.

[GCA]

In case you're curious (I was!), the CMBS value psf of the 19 "partial recapture" projects was $65, whereas the 179 ones with no project at all was $55.  So the properties on which the "partial recapture" projects have been performed are much closer to being representative, but still they're not quite there.

[Shane]

I tried fiddling around with the CMBS annex over lunch.  Made some general assumptions which I would appreciate some feedback on as I am not very familiar with the space.  I divided the real estate portfolio into High Value PSF, Medium Value PSF, Low Value PSF.

High Value (12.3%) = Cushman Stabilized Appraised Value >$100 psf, assume $40 psf rent
Medium Value (62.1%)= Cushman Stabilized Appraised Value >$30PSF & <$100 psf, assume $15 psf rent
Low Value (25.6%) = All of the rest, assume $10 psf rent.

This averages to ~$17psf

This doesn't separate the JVs or anything, quick work.