SRG - Seritage Growth Properties

[BTShine]

One thing of interest is the price of redevelopment per square foot.   The last three years (6 months for 2018) are as follows:

2016: $138.50             
2017: $197.20             
2018: $111.50           

While we don't see disclosure on what specific SNO or projected lease rates are associated with each tranche, it might be fair to assume that the 2018 redevelopments are associated with the lower SNO lease rates we saw this quarter.   If we continue to see redevelopment costs in the low $100s psf (it was below $100 in Q2 2018.  $97.60 to be exact) we should expect to see Seritage signing lower lease rates than before.  Based on this history I'd expect to see $100 psft of redevelopment capex produce new lease rates of around $14.50 a square foot. 


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Calculations:
2016  (=$370.7/2.677 sqft)
2017  (=$693.6/3.517 sqft)
2018  (=$152.7/1.369 sqft)

[koshigoe]

at least one recently closed Sears being actively offered for sale

https://www.pyramidbrokerage.com/properties/img/property/flyers/G5340.pdf

[LongTermView]

One thing of interest is the price of redevelopment per square foot.   The last three years (6 months for 2018) are as follows:

2016: $138.50             
2017: $197.20             
2018: $111.50           

While we don't see disclosure on what specific SNO or projected lease rates are associated with each tranche, it might be fair to assume that the 2018 redevelopments are associated with the lower SNO lease rates we saw this quarter. 

Good point, BTShine. The lower SNO lease rates need to be evaluated in tandem with the redevelopment costs.

[GCA]

The incremental returns on capex for redevelopment are most important for me.  Also, if investing this capex not only increases lease rates per square foot, but also locks in existing rents with a higher quality and more diversified tenant base, that also creates value. 

I’m less concerned with absolute lease rates and more concerned with how much capital SRG must invest for the related rent increases.

I agree but you also have to consider how much of this is priced in?  It's not like SRG is trading at book value.

[BTShine]

If the majority of SRG's value will be realized via renting existing and redeveloped/newly developed space, then I think incremental rents and the related return on capex are what will help us determine the intrinsic value of the company.   Another important factor we must try to predict is the amount of capital they can invest on new and re-developments every year and in total over the next 10+ years with this portfolio. 

On the other hand, if you believe SRG will begin to sell off significant portions of land, then market value and it's approximate relation to book value are of importance.  Returns on capex do not matter if we are liquidating the portfolio.  In the current state I don't think SRG plans to liquidate it's land portfolio and therefore book value is not of utmost importance.   

[GCA]

If the majority of SRG's value will be realized via renting existing and redeveloped/newly developed space, then I think incremental rents and the related return on capex are what will help us determine the intrinsic value of the company.   Another important factor we must try to predict is the amount of capital they can invest on new and re-developments every year and in total over the next 10+ years with this portfolio. 

On the other hand, if you believe SRG will begin to sell off significant portions of land, then market value and it's approximate relation to book value are of importance.  Returns on capex do not matter if we are liquidating the portfolio.  In the current state I don't think SRG plans to liquidate it's land portfolio and therefore book value is not of utmost importance.

Once you extrapolate how much capex will be necessary to redevelop the entire portfolio then you'll see why they will have to sell off a substantial portion of their properties (whether via whole property sales or through JVs/partial sales).  They're not liquidating but they are going to need a ton of cash for redevelopment.  The contemplated Dallas office towers alone have an $800MM price tag.  Total portfolio cash needs is easily in excess of $2B.

[BTShine]

Do you think they will have an opportunity to access capital via mortgage debt?  I would imagine that the income and related value from their 68 redevelopments (as shown on page 4 of the IR presentation - link below) would support more mortgage debt than the $1.3 Billion SRG currently has.  They estimate these 68 redevelopments to be worth over $3 billion.  I would think they could take out another $700 million to make their debt load $2 Billion.  This way they can access capital as they progress and keep all real estate.


http://ir.seritage.com/Cache/1001237538.PDF?O=PDF&T=&Y=&D=&FID=1001237538&iid=4584761

[Shane]

BTShine - off memory, this is not possible under the current arrangement.  Obviously they would like to change this.

[BTShine]

BTShine - off memory, this is not possible under the current arrangement.  Obviously they would like to change this.

Good point.  I oversimplified the process.  They would either need to renegotiate their current mortgage and increase it's size.  Or they could obtain a new mortgage and pay off the exiting one.  There was a prepayment penalty, but that is not in place anymore as of March 9, 2018.

[Deepdive]

The incremental returns on capex for redevelopment are most important for me.  Also, if investing this capex not only increases lease rates per square foot, but also locks in existing rents with a higher quality and more diversified tenant base, that also creates value. 

I’m less concerned with absolute lease rates and more concerned with how much capital SRG must invest for the related rent increases.

I agree but you also have to consider how much of this is priced in?  It's not like SRG is trading at book value.

Why do book value matter when dealing with real estate companies?  Whether you bought the properties 10, 20, 50, 100 years ago make a huge difference on how book value relates to current market value.