SRG - Seritage Growth Properties

[Tintin]

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.

Agree that the preferreds would be an interesting play.  Here is my take on them - SRG cannot redeem them until December 2022, and even if real estate retail values tanked (which would lead to the preferreds trading well below par value beyond that date) the likelihood of near zero interest rates beyond 2022 would almost certainly lead SRG to redeem them.  Why continue to pay at 7% if you might be able to borrow for half that rate?  On this basis would it be fair to assume that preferred share holders almost certainly get their $25 back in December 2022?

[thepupil]

Here's my take:

SRG capital structure may need to change.

$1.6B-$2B <--Berkshire Hathaway
$70mm     <--Preferred owned by a bunch of scattered retail/diversified funds

Common Equity (ESL and others)

Restructurings are zero sum and it seems that there's no one to look out for that little old preferred's interest. That said, because it's so small, there's not a huge reward to be had in screwing them either.

I don't see why they necessarily take out the preferred at call date. I would say it's paying a BELOW market coupon for an illiquid, highly subordinated orphan in the capital structure. I'd underwrite it as a perpetual and hope they raise common to de-risk you, rather than, for example, issue to the common shareholders a right to buy a convert that pays down the Berkshire loan partially in exchange for a lower coupon and refinance/extension (which would kick preferred and non-participating commons to the back of the line)

That's what I'd do if I was Eddie and crew and SRG needed cash.

[Gregmal]

https://therealdeal.com/miami/2020/10/16/seritage-sells-hialeah-shopping-center-for-21m/

Interesting transaction here. Noticed they've been doing a bunch with Four Corners as well.

Perhaps interesting in the context of develop..sale/leaseback strategy. Typically you see these trade much differently. I would imagine they are probably getting better value being on the hook for a longer duration and a "guaranteed" clip. But the downside is obviously that you see Bed and Bath close, or another big tenant or two leave and you're bleeding out again. Time will tell I suppose. If I'm buying the asset from them, I like this. If I'm SRG, I guess its better than not sell it at all or selling it straight up(high cap/less cash). My understanding is that down the line they can buyout the lease as well...typical of developers looking for liquidity.

[thepupil]

The cynic in me says it’s a way to keep gross leasing revenue (a key metric wrt getting more cash from Berkshire) while printing a lower looking cap rate. Until we know more though, tough to conclude much.

[davel]

Hi guys,

I also started looking into SRG, but already stumbled when looking at their revenues vs. annual base rents (ABR).
In the attached image I plotted the ttm revenues, the total annual base rent as well as the annual base rent from only open properties (counting Sears and diversified but excl. signed-not-open (SNO)).

In their 2019 AR they define the following:
Revenue Recognition: Rental income is comprised of base rent and reimbursements of property operating expenses. Base rent is recognized on a straight-line basis over the non-cancelable terms of the related leases.
Revenue recognition under a lease begins when the lessee takes control of the physical use of the leased asset.
Annual Base Rent: [ABR is] based on signed leases and including JV Properties presented at the Company's proportional share.

Now I'm surprised by the fact that the ttm revenue can be so much higher than the annual base rent of the open properties. The one reason I see is that revenue is also recognized for properties which are SNO. It seems however strange to me that lessees would take control of the physical asset but not open it asap to generate revenues - so I don't think that's very realistic.
Also ABRs include SRG's share of JVs, while the revenues don't include this share. This is another fact, which should drive ABRs higher relative to revenues.

It is very possible, that I misunderstand their accounting/definition of ABR/revenues. So any clues on this one would be much appreciated!

[bizaro86]

The revenue recognition is based on straight lined rents, which is required by GAAP. So say you have a lease with 10 years at $5, 10 years at $10, 10 years at $15. The revenue from the lease is recognized as a straight $10 the entire time, as that is the average.

If they don't straight line the average base rent metric that could explain the difference. Given how new their leases are, most of them won't have made it through escalations yet. So revenue reported will be consistently bigger than cash received.

[davel]

thanks for the fast reply!

I thought first the same, but then again the straight-line rent adjustments in the cash flow statement are very low, so they can't explain the full difference. Also they vary between positive and negative (-15.6mn, 2.8mn, -3.7mn for 2019, 2018 and 2017.)

[realassetsvalue]

I haven't looked carefully at the numbers but I would assume that two significant factors are that (A) Sears stores have been closing progressively over time (and paying termination fees) and (B) that Seritage has recebtly been selling some redeveloped, stabilized properties, the TTM rent figures include rent from these soruces but they are not factored into the annualized rent number. Could that explain the delta?

[davel]

thanks a lot also for your suggestions! These do however also not yet make up for the entire difference. Below a quick overview of the items I now used in the adjustment and which ones not (for what reason)

- straight line recognition (is used in adj. - but rather small)
- termination fee (is used in adj. - but rather small)
- gains on property sales (not used in adj. since not part of "Total revenue")
- mgmt and other fee income (is used in adj.- but rather small)
- sale of redeveloped, stabilized properties (is used in adj. - here I used a 6% cap rate to identify (roughly) revenue loss based on transaction values - also rather small)

Even after making all these adjustments, ttm revenue is still on average 50mn above ABR (see image).

I think while writing this I figured it out:) I think it's the tenant reimbursements, which are since 2019 classified as rental income. In 2018, these accounted for 57mn and in 2017 for 62mn. Assuming that the 2019 value is also ca. 25% of total revenue (like in 2017 & 2018) we get close to the remaining 50mn delta.
In the second graph you can see how well the ABR adjusted by the points above + tenant reimbursements fits the ttm revenue

thanks a lot guys!!

[Foreign Tuffett]

CFO just sold 10K shares

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

And now the CFO is out

https://www.sec.gov/Archives/edgar/data/1628063/000114036120024727/brhc10016686_ex99-1.htm