SRG - Seritage Growth Properties

[Tintin]

I'm very open-minded on Seritage, so would be grateful if somebody who's bullish could help me place a missing link in my analysis.

When viewed as a 'cigar-butt' investment, I can see a liquidation value margin of safety at $10 or lower after the debt's been repaid.  But where I am having more trouble is making the link between where SRG is today, and the belief that it could become a multi-bagger 10 to 20 years down the road.

I respect and admire a lot of the 'guru' investors who have recently ploughed into the stock, and am particularly curious about the fact that Guy Spier added to his position in Q2.  Spier by his own admission is far more risk-averse than Pabrai, and yet he added a significant tranche to his position.  So I am still on a journey to try and make the link as to how this stock becomes a long-term compounder before I file it in the 'too hard' box.

Phil Town recently commented that the stock has the potential upside of reaching $140 a share long-term.  I have reverse-engineered this figure as follows;

$140 * 55.9m shares = $7.8bn

Add $1.6bn of existing debt for an EV of $9.4bn

Assume a more optimistic long-term cap rate on well developed properties at around 6%, and we get approx $550m NOI, which can be achieved if we optimistically assume $25 rents per sq foot on 22m sq ft of GLA (this also assumes that SRG sells another 7m sq ft of GLA in the coming years).

Even if we assume that these reasonably optimistic assumptions play out, here is the missing link I just can't piece together right now...

In the latest 10Q dated June 30th, SRG states that out a total GLA of approx 29.3m sq ft (including their share of JV properties), approx 18.8m sq ft is either being redeveloped or is available for lease.  As described above, if we assume that 7m sq ft gets sold off, that still leaves 11.8m sq ft of GLA that needs significant redevelopment expenditure in order to achieve a rental figure of $25 per sq ft.

Assuming a 15% yield on CapEx redevelopment, SRG would have to spend $166 per sq ft in order to achieve rental income of $25.  That's almost an additional $2bn that needs to be spent on the remaining 11.8m sq ft of GLA that is currently not generating any income for Seritage.  Some of this figure is clearly going to be covered by the sale of further properties, but nowhere near enough to cover the full sum.  And that's before we even factor in the cash burn they are going through right now (although Berkshire's leeway on interest payments should cash levels fall too low will clearly give them breathing space, particularly as the rate of cash burn declined a lot in Q2).

Therefore, when I look at a cautious investor such as Guy Spier adding to his position, I cannot bridge the link between the 'cigar-butt' outcome, which I can see a lot more clearly, and the 'multi-bagger' outcome, which I am struggling with.

Have I made erroneous assumptions regarding the redevelopment build costs?  Is it actually the case that a substantial number of the remaining properties are already in much better condition than I am envisaging, thereby requiring significantly less average redevelopment costs of $166 per sq ft?

I don't want to throw in the towel on this just yet so would appreciate any insights into where you might think I am going wrong.  Thank you.

[stahleyp]

Town and Spier are gurus? Man, the guru standard has really gone down hill lately.

Has Town ever published performance?

I'm pretty sure Spier hasn't beaten the index by much (if any) since he started in 1997.

[thepupil]

Tintin, nice first post and welcome!

Agree completely with your conclusion.

I think you either have to

a) own the stock and be comfortable with a rights / equity offering (or maybe more than one) to bridge the gap

b) wait to see what happens / not own the stock

c) explicitly identify how they delever.

I decided I couldn’t do C (see a few post back) after reviewing the assets, albeit over a weekend, so maybe the gurus have done better work.

 so I am in camp B, recognizing that camp A may be right.

Enough cheap RE out there to not deal with an inability to figure out th eventual capital structure / path to sustainability. It obviously doesn’t have the scale of non earning assets / development, but I thin UE is much more straightforward / safer and I think CDR is a levered option with multibagger opportunity on a refi/liquidity bridge for crappy strip centers. I think these two are an interesting barbell as it relates to strip center / outparcel play. SRG has some stuff that’s in a different class (like their Santa Monica office asset) so they aren’t directly comparable.

[Saluki]

I wouldn't buy a pair of socks based on Phil Town's recommendation.  I know he made a lot of money public speaking and selling books but his claims of vast success in picking stocks (without providing evidence to back it up) seems dubious at best.

I own some SRG from when it was higher and didn't sell (or buy more) when it tanked.  I posted in the "what are you buying now" thread about getting some of the cumulative preferreds ($25 par). I got a couple of fills as low as $12.50 (13% dividend at that price) but not a lot of  volume of the preferreds trade and that dip didn't last very long.  It's almost $20 now (yielding 9.6%), so i'm not buying more now, but if you believe in the common, then the preferreds are a no-brainer to put on your watch list if they dip again, or if you just want a place to park some money.  I think they eventually get their financing sorted and money is so cheap now that they can call the preferreds at par in a couple of years.  If they suspend the dividend, they can't pay any dividend on the common until the preferreds are current and if they call the preferreds, they have to pay all the dividends in arrears.  Also, if they go under the preferreds have a $25 liquidation preference. 

[BG2008]

Money is cheap for companies that doesn't have perceived terminal risk 
The credit market is bifurcated into 1-3% cost of debt for those that are sustainable and growing even just 1-2% a year for the foreseeable future and usurious rates for assets that are deemed to have 10-15 year lives

I don't know what the psychological phenomenon is called.  Maybe there is a name for it.  People constantly ask me for my opinions on SRG and retail real estate investing in general.  I was approached by 20 people at an event once for my opinion on SRG.  It is almost like people are seeking confirmation that it is a good investment.   When I tell them I don't like it because it's just too hard for me.  The Amazon risk is too high.  Developments are risky.  Shit happens.  They somehow justifies it with Buffet/Munger, potential multi-bagger etc.  It is the most bizarre and weirdest psychological reaction.  I am probably being an asshole for pointing this out.  But it's a very peculiar phenomenon that I only observe with SRG, mall and retail real estate investing.  It's almost like people have made up their mind already and when I offer the bear case, they find a way to refute it.  I think I need to permanently walk around with a sign that says "no opinions on retail real estate investing."       

Maybe, the problem is that I am the asshole and I constantly project my negative views on SRG and I need to shut the F up.  No one needs a Debbie Downer.   

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.     

[Gregmal]

Money is cheap for companies that doesn't have perceived terminal risk 
The credit market is bifurcated into 1-3% cost of debt for those that are sustainable and growing even just 1-2% a year for the foreseeable future and usurious rates for assets that are deemed to have 10-15 year lives

I don't know what the psychological phenomenon is called.  Maybe there is a name for it.  People constantly ask me for my opinions on SRG and retail real estate investing in general.  I was approached by 20 people at an event once for my opinion on SRG.  It is almost like people are seeking confirmation that it is a good investment.   When I tell them I don't like it because it's just too hard for me.  The Amazon risk is too high.  Developments are risky.  Shit happens.  They somehow justifies it with Buffet/Munger, potential multi-bagger etc.  It is the most bizarre and weirdest psychological reaction.  I am probably being an asshole for pointing this out.  But it's a very peculiar phenomenon that I only observe with SRG, mall and retail real estate investing.  It's almost like people have made up their mind already and when I offer the bear case, they find a way to refute it.  I think I need to permanently walk around with a sign that says "no opinions on retail real estate investing."       

Maybe, the problem is that I am the asshole and I constantly project my negative views on SRG and I need to shut the F up.  No one needs a Debbie Downer.   

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.   

Keep being as asshole. Its informative.

The phenomena is easily explained as the Ghosts of Sear's past. All the lunacy and delusional there just carried its way into this, probably because there is nothing left over there. Combining what you and pupil have said, why bother here? If you have something that may at best resemble some combo of UE or SPG or something in between, why not just go there? And if you want some high leverage bet, why not just go to those and buy slightly in the money LEAPs?

[Foreign Tuffett]

CFO just sold 10K shares

https://www.sec.gov/Archives/edgar/data/1600056/000089534520000914/xslF345X03/form4.xml

[RadMan24]

I'm very open-minded on Seritage, so would be grateful if somebody who's bullish could help me place a missing link in my analysis.

When viewed as a 'cigar-butt' investment, I can see a liquidation value margin of safety at $10 or lower after the debt's been repaid.  But where I am having more trouble is making the link between where SRG is today, and the belief that it could become a multi-bagger 10 to 20 years down the road.

I respect and admire a lot of the 'guru' investors who have recently ploughed into the stock, and am particularly curious about the fact that Guy Spier added to his position in Q2.  Spier by his own admission is far more risk-averse than Pabrai, and yet he added a significant tranche to his position.  So I am still on a journey to try and make the link as to how this stock becomes a long-term compounder before I file it in the 'too hard' box.

Phil Town recently commented that the stock has the potential upside of reaching $140 a share long-term.  I have reverse-engineered this figure as follows;

$140 * 55.9m shares = $7.8bn

Add $1.6bn of existing debt for an EV of $9.4bn

Assume a more optimistic long-term cap rate on well developed properties at around 6%, and we get approx $550m NOI, which can be achieved if we optimistically assume $25 rents per sq foot on 22m sq ft of GLA (this also assumes that SRG sells another 7m sq ft of GLA in the coming years).

Even if we assume that these reasonably optimistic assumptions play out, here is the missing link I just can't piece together right now...

In the latest 10Q dated June 30th, SRG states that out a total GLA of approx 29.3m sq ft (including their share of JV properties), approx 18.8m sq ft is either being redeveloped or is available for lease.  As described above, if we assume that 7m sq ft gets sold off, that still leaves 11.8m sq ft of GLA that needs significant redevelopment expenditure in order to achieve a rental figure of $25 per sq ft.

Assuming a 15% yield on CapEx redevelopment, SRG would have to spend $166 per sq ft in order to achieve rental income of $25.  That's almost an additional $2bn that needs to be spent on the remaining 11.8m sq ft of GLA that is currently not generating any income for Seritage.  Some of this figure is clearly going to be covered by the sale of further properties, but nowhere near enough to cover the full sum.  And that's before we even factor in the cash burn they are going through right now (although Berkshire's leeway on interest payments should cash levels fall too low will clearly give them breathing space, particularly as the rate of cash burn declined a lot in Q2).

Therefore, when I look at a cautious investor such as Guy Spier adding to his position, I cannot bridge the link between the 'cigar-butt' outcome, which I can see a lot more clearly, and the 'multi-bagger' outcome, which I am struggling with.

Have I made erroneous assumptions regarding the redevelopment build costs?  Is it actually the case that a substantial number of the remaining properties are already in much better condition than I am envisaging, thereby requiring significantly less average redevelopment costs of $166 per sq ft?

I don't want to throw in the towel on this just yet so would appreciate any insights into where you might think I am going wrong.  Thank you.

Hi Tintin, great post and questions. This is no doubt a butting-heads investment idea.

One of the initial thesis of SRG is location. A lot of Sear's real estate sits on prime entrance locations.

Second, redevelopment. While some say there's a lot of risk, etc., redevelopment is nothing new in the real estate industry. It's all around us.

Third, densification - the acres of parking lots and any future vertical growth of properties are not accounted for in today's sq ft.

The vast majority of SRG's tenants from here on out will be "pandemic survivors" and redevelopments tailored to the "new normal."

SRG has released tentative plans for multi-purpose developments as well, worth trying to understand how those opportunities might pan out, estimate a valuation when complete, and how many of those exist in SRG's portfolio, and capex needs for each one. Do note that SRG has been reported to have sold off its Chicago assets it was working on.

Best of luck,

Edit: added note about chicago projects

[Mephistopheles]

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.     

Thanks for the shout out. And for the GRIF suggestion, many people on the board have made a lot of $$$ because of it.

The one thing that stood out to me from what you said on the M thread was : "I don't like investing when I need to trust CEO will liquidate the company and throw in towels.  Americans don't like throwing in the towels. "

So true, you can see even now Macy's insists on continuing a retail footprint. Except now it's a more dire position that even if they wanted to monetize the RE, they are behind everyone else who is trying to do the same. On top of that they've encumbered the RE at an expensive rate.

[BG2008]

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.     

Thanks for the shout out. And for the GRIF suggestion, many people on the board have made a lot of $$$ because of it.

The one thing that stood out to me from what you said on the M thread was : "I don't like investing when I need to trust CEO will liquidate the company and throw in towels.  Americans don't like throwing in the towels. "

So true, you can see even now Macy's insists on continuing a retail footprint. Except now it's a more dire position that even if they wanted to monetize the RE, they are behind everyone else who is trying to do the same. On top of that they've encumbered the RE at an expensive rate.

When I was a little greener in this business, I always  asked "what do the older guys know that I don't?"  I used to get into pretty heated argument with a friend who is extremely intelligent and usually right.  He relied on his reasoning abilities.  But there are certain things that older guys have seen and they just know.  After a few rodeos, you know that Nikola looks like a scam.  After a few "deep asset value", you realize that these CEOs won't throw in the towels.  I find it extremely helpful to ask older investors who they saw.  Now, I am also thumb sucking because I missed out on opportunities like Goog, FB, and Amzn because I drew too much from Pets.com.  Someone who is 10 years younger probably won't have memories of late 90s bubble and the 08 bubble.  They grow up in a world of smart phones.  So it all intuitively makes sense.  The stuff that is possible, the targeted ads etc have been talked about 20-25 years ago.  But not everyone has a smart phone back then.  The hardware and software weren't there.  I was too skeptical when they actually become possible.