SRG - Seritage Growth Properties

[GCA]

https://www.businesswire.com/news/home/20180322005548/en/Seritage-Growth-Properties-Invesco-Real-Estate-Announce

The appraised value in 2015 was low 50s million. And they split it at 145 mil basis, albeit after some planning and pre-work.

The Hilco 'stabilized value' in 2015 was around 100 mil. So there should be ample opportunity to harvest more cash through refinancing in future.

Thanks to Alex/GCA for providing CMBS data.

Yes, the Hilco "stabilized value" in 2015 was around 100MM which means that their analysis was...................... spot on! Given that the Invesco investment of $50MM for 50% values the property at $145MM after construction costs are taken into account... i.e. $50MM for 50% = $100MM of value today plus $45MM of construction costs = $145MM

Am I missing anything here?

[koshigoe]

You're ignoring the Hilco lease up costs of 24 mil to get to the 100 mil. (no free lunch here!)

They got the 100 mil valuation basis before spending (most of) the money.


Hilco theory said:

53 mil acquired
24 mil lease up

= 99.2 mil stabilized value back

total 99.2 mil SRG ownership on 77 mil investment 28% return

What happened:

53 mil acquired

sell half get 50 mil value back

put in 22.5 mil lease up

get 145/2 = 72.2 stabilized value back

total 72.2 mil SRG ownership on 25.5 mil investment 183% return

These numbers indicate to me that 1) Hilco greatly underestimates SRG's value enhancing abilities through creative JV and leveraging of cheap land acquisition price 2) SRG has an enormous margin of safety at present price, or even a more reasonable 40-45 a share.

[GCA]

Or pretending Invesco never came in:

53 MM acquired
45 MM "lease up" (though probably more because they've been working on this property for a while)
=
145 MM of stabilized value

total 145 MM SRG ownership on 98 MM investment, or 48% return

Thanks

[koshigoe]

Yes, I agree with you on a wholly owned basis it's not nearly as eye-popping. Though being off by 20% (it will be more because there's planned 2nd phase converting the parking lot) on a commercial real estate valuation usually makes one party of the transaction a pretty big winner, i.e: Seritage.

Could one imagine the JV potential on a Valley View site, or the Aventura mall? They could potentially extract several hundred million from just those two redevs, essentially horse trading their way into a position where they get 50% of massive real estate projects for just some incremental lease up costs. JVing it seems really leverages the returns on any cash investment made by them.

It seems SRG is getting paid like a consultant, do all the dirty work then get a big pay day after all the development hurdles are finished. The JV on Santa Monica was announced only when it finally got through the Coastal Commission, the last step.

[GCA]

These numbers indicate to me that 1) Hilco greatly underestimates SRG's value enhancing abilities through creative JV and leveraging of cheap land acquisition price 2) SRG has an enormous margin of safety at present price, or even a more reasonable 40-45 a share.

Yes, it would definitely appear Hilco greatly underestimated the Santa Monica property... though I'm not sure what this implies about the rest of the portfolio given Santa Monica is obviously special.

Again, unless Santa Monica is representative, I'm not sure how you get to a total portfolio valuation which is necessary for a margin of safety.

[koshigoe]

Outlined in the latest Seritage annual letter was a cryptic comment from Schall,

"we expect there to be a growing bifurcation between developers and platforms that possess the scale, expertise, capital, and support from their investors to proactively redevelop prime real estate into dominant retail and mixed-use hubs – and those that do not possess those characteristics."

Could he have been referring as well to Westfield, and even GGP, two of the largest and strongest mall retailers in the US and both recently (and most probably in GGP's case) acquired?

While both strong companies with strong malls, they lack the freedom to wholly transform their malls into mixed use centers, exactly the premise of the GGP takeout by BPY. How is Mathrani going to say we're just going to go willy nilly to mixed use? No capital, no patience in the markets. He needed the cover of a BPY.

Buffett has said in past about how time is the friend of the wonderful business. Once free from the Sears bankruptcy miasma (which arguably has already passed) SRG strengths will blossom for the investment community to see, with total control over large acreage that others want in on.

And SRG won't have to just sell out to another developer (a BPY or Unibail), they will be in the catbird's seat, and able to command comically good terms compared to their acquisition price, as evident by the Santa Monica deal and potentially later this year with several other large scale redev JVs.

This most critical structural advantage seems lost in the fog of war now with most talk on the immediate funding issues.

I also believe SRG exhibits the characteristics of a platform company a la Ackman, though for the non-believers in the SRG story this might be a bridge too far at the moment!

[scorpioncapital]

All the true, the only liability I see is the name on the Board of Trustees with initials ESL and a major unitholder. Hopefully a REIT has more protections than a corporation and there's less damage he can do to this business than to Sears. Other than that, agree with the thesis.

[Foreign Tuffett]

Outlined in the latest Seritage annual letter was a cryptic comment from Schall,

"we expect there to be a growing bifurcation between developers and platforms that possess the scale, expertise, capital, and support from their investors to proactively redevelop prime real estate into dominant retail and mixed-use hubs – and those that do not possess those characteristics."

Could he have been referring as well to Westfield, and even GGP, two of the largest and strongest mall retailers in the US and both recently (and most probably in GGP's case) acquired?

While both strong companies with strong malls, they lack the freedom to wholly transform their malls into mixed use centers, exactly the premise of the GGP takeout by BPY. How is Mathrani going to say we're just going to go willy nilly to mixed use? No capital, no patience in the markets. He needed the cover of a BPY.

Buffett has said in past about how time is the friend of the wonderful business. Once free from the Sears bankruptcy miasma (which arguably has already passed) SRG strengths will blossom for the investment community to see, with total control over large acreage that others want in on.

And SRG won't have to just sell out to another developer (a BPY or Unibail), they will be in the catbird's seat, and able to command comically good terms compared to their acquisition price, as evident by the Santa Monica deal and potentially later this year with several other large scale redev JVs.

This most critical structural advantage seems lost in the fog of war now with most talk on the immediate funding issues.

I also believe SRG exhibits the characteristics of a platform company a la Ackman, though for the non-believers in the SRG story this might be a bridge too far at the moment!

I broadly agree with your thoughts here, although I would frame things differently. Instead of thinking about SRG as a platform company, I think it's more helpful to think of it as having massive optionality + more control over its own destiny than the enclosed mall operators. The optionality comes from owning ~230 properties spread over 49 states, many with outsized land parcels. SRG can largely pick and choose where and when to deploy capital in a way that REITs with smaller or less geographically dispersed footprints cannot.

Enclosed mall operators are constrained by the interests and rights of both inline and anchor tenants. This makes it hard for them to engage in large scale redevelopment projects unless they can get all their constituencies on board. A great example of this is the underperforming SHLD stores that have been the thorns in the sides of many enclosed malls. SRG's contractual right to partially or wholly kick SHLD out of properties it wants to redevelopment significantly mitigates this problem.

 

 

[GCA]

I'm not sure just how much of an advantage SRG has in redeveloping their properties versus the mall owners.  I agree SRG has more focus here, and support from their investors... but other than that?  Yeah these operators need to get their anchor tenants on board, but my understanding is that SRG can't really do much either without getting the go ahead from the other anchor tenants.  Hah, maybe that's another reason for under-investment in the stores (make 'em so bad that the other anchors are happy to get rid of the "Sears blight").

In any case, here is an example of Simon doing just that... redeveloping 5 properties into mixed use... and in fact its the 5 JV properties that SRG recently sold to Simon:

http://www.insideindianabusiness.com/story/37921409/simon-to-redevelop-five-properties

[koshigoe]

Yes it would be interesting to learn the development economics Simon will achieve on those 5 ex JV properties, and also the thinking of SRG management on why to sell at a 10% profit rather than participate in the redev.

Simon has said they were about 7% return with a 50% recapture, perhaps after paying SRG the 'finders fee' they won't achieve much better on a 100% basis.

It seems in this case Simon isn't at a disadvantage to SRG in redeveloping these ex JV sites. But I don't see how one can extend the 'just as favorable as SRG' economics to other mall owners with a Sears that aren't in or were in a JV.

These owners don't have the benefit of Eddie working both sides of the deal to shut the store down nor a master lease that allows the mall owner to kick out Sears.

For example, WPG being obligated to bid for Bon Ton to basically pay itself back in rent so there's no gaping hole there in its malls. SRG has no such ugly decision to contemplate.

I think the intangible blank slate advantage discussed doesn't lend itself to smoking gun examples just yet, but will be important as the retail evolution plays out in next few years.

And there are some potentially blockbuster deals on the near horizon for SRG including plans at Hicksville, Valley View and possible JVs at Aventura, La Jolla. Right there is enough to justify current market price and fully fund the pipeline to 150 m NOI, and then you're left with 75% of GLA for growth on your terms.