Description

“On the rare occasions that a rights offering is used to effect a spinoff, it is worthwhile to pay extra close attention”
-You Can Be A Stock Market Genius, p. 109 of the kindle version

Tl; dr: net of cash and some other assets, investors are effectively paying nothing for Seaport District at SEG. Seaport is an entire controlled neighborhood in Manhattan with a >billion of cost in the ground. Yes, it’s been troubled (to put it lightly)…. but the optionality is too large to ignore, and the technical around the backstopped rights offering present interesting optionality in the short term.

And one quick note: I’m going to use $25/share as SEG’s share price through this write up; that’s a bit below where it’s trading as I post this, but I think $25 is a fair number to use given that’s where the rights offering is priced and the rights offering will provide the opportunity to by ~1.25 shares (or more) for every one share you own. Either way, it’s a small difference in price / I don’t think changes the large upside potential here. I've also used the post-rights offering share count and cash balance in the description, before the rights offering, they have ~5.6m shares out with just ~$10m of net cash.

I realize I’m playing to the crowd / professor here, but I’ve long considered You Can Be A Stock Market Genius the best book for modern stock investing. If I had to simplify the book down to one core concept, it would be spin offs can be lucrative (actually it would be incentives matter, but that’s so trite I figured I’d go with something a little more bespoke… plus it’s the main thing almost everyone takes from the book anyway!). Why? For four main (and somewhat interconnected) reasons:

1. Forced selling from noneconomic shareholders (i.e. dividend paying fortune 500 company spins off a small non-dividend paying company worth a fraction of its overall value; shareholders can’t own the new spin for a variety of reasons)
2. Companies that have previously languished receive new focus (i.e. maybe a company was treated as a cash cow inside of their old structure, but once spun out it can invest the cash into profitable growth opportunities the prior parent had neglected).
3. Previously non-incentivized insiders suddenly have a lot of reasons to care about the company creating value (i.e. the top brass may have gotten stock in a larger conglomerate they were a small piece of before…. but, post spin, they get options struck in their company. Under a conglomerate, finding another 10 bps in cost cuts might not be worth the effort / headache / internal disruption given it barely moves the needle…. but when it can send the stock up 10% and capture management millions of dollars in wealth, suddenly the incentives are really aligned!).
4. This touches on all the prior three reasons… but management may be incentivized to keep the share price low out of the gate in order to maximize their economic exposure to the stock (i.e. options might be struck at the spin price, or at the price of the spin 30 days after the spin…. so management may intentionally try to tank the spin to maximize their upside!). So by paying attention early, you may be able to buy at a cheap price.
   1. This is mainly why rights are so interesting alongside a spin; management can design rights offerings to maximize their participation and exposure to equity upside.

Earlier this month, Howard Hughes (HHH) completed their spin off of Seaport Entertainment (SEG); this is the first spin-off I can remember that is coming with a rights offering (though this is coming with a backstopped rights offering, not a rights offering for the whole spin, which is what I believe Greenblatt refers to in his quote… I haven’t seen one of those in a long time either!). I believe SEG fits all of the criteria for a severely mispriced spin, and, while not without risks, I think SEG presents a hugely skewed risk / reward.

Seaport Entertainment consists of variety of assets, with the headliner being the aptly named Seaport District in lower Manhattan:

For those who’ve followed HHH, the reason for the spin is clear: once considered a potential crown jewel (For example, PSH’s 2017 AR Notes “The Seaport District, one of HHC’s most valuable assets, is on track for its opening in the summer”), the Seaport has been an abject disaster. All in, HHH had invested well over $1B into Seaport thinking that it would turn into a trophy property as it scaled up / developed. Here’s what HHH’s 2017 AR had this to say about Seaport: “Our total construction costs for the Seaport District… equal $785m ($731m net of insurance)…. We are targeting a stabilized annual return of between 6% and 8% on our net costs…. As an irreplaceable part of Manhattan, you cannot assign a value on owning a district like this in New York. There is no true comparable to the Seaport District. Therefore, we believe that if we ever did decide to sell, the property would realize a historically low cap rate with a significant spread relative to our return on cost yields.”

Instead of a trophy asset, the Seaport has turned into a cash inferno; the Seaport lost ~$50m in NOI in both 2023 and 2022, and somehow those losses seemed to be accelerating as they lost ~$32m in the first half of 2024:

Given a variety of spinoff costs and some funkiness with their JVs, that NOI number might slightly overstate how bad things are at Seaport… but it does not change the fact that Seaport has (again) been an abject disaster, with HHH taking a ~$710m impairment on it in 2023 (see p. 89 of 2023 10-K) and choosing to spin the company off so HHH investors could focus on the cash generation of their core business rather than continue to fund nonstop losses at Seaport. Of particular note, given SEG’s continued cash inferno, HHH chose to spin SEG off with a rights offering (backstopped by Pershing) rather than park a ton of cash on SEG’s balance sheet.

Almost immediately after completing the SEG spin off from HHH, Ackman / Pershing Square filed a 13-D noting they were considering taking HHH private. With the benefit of hindsight / knowing about that bid, I think it’s clear that Ackman / Pershing needed SEG to be spun out of HHH before they could attempt a take private…. but I think you could come up with two completely different reasons for needing that spin:

• Reason #1: Seaport is a never ending inferno of cash burn with enormous negative value. Ackman couldn’t take HHH private with SEG inside because it would hang like an anchor around his / the company’s neck forever. Ackman was willing to backstop a rights offering and light ~$175m on fire in order to contain / limit the losses at HHH and take it private.
  • If you were taking this example to its absolute nightmare conclusion, the rights offering is basically designed to cover SEG’s cash burn for multiple years so that, in an absolute worst case scenario, SEG can cover losses long enough to get past the fraudulent conveyance look back to HHH.
• Reason #2: despite the negative results to date, the upside of Seaport is enormous, and both Ackman and the board know it. Seaport has ~$1B of cost sunk into and will certainly burn more cash in the near term, while HHH currently (post spin and with a little take private premium post the 13-D) sports a ~$3.5B market cap; there’s simply no way to take HHH private if it still has SEG in it because the range of values given that upside / cost basis are too wide and trying to negotiate a price for Seaport would effectively overwhelm everything else in negotiations (as well as making financing much more difficult).
  • To make this simple: let’s say the board is asking Ackman to pay $4.5B for HHH post spin, and Ackman is trying to pay $3.5b. There’s room to meet in the middle there…. but if SEG is inside and Ackman is arguing it’s worth zero or $500m while the board is pushing for $1b or $1.5b, then the negotiations for SEG basically overwhelm the negotiations for all of the rest of HHH!

I could believe either side of those arguments… however, at current prices, SEG is one of the most mispriced options I’ve ever seen. You don’t have to believe there’s much of a chance of reason #2 playing out for SEG to offer a completely skewed risk reward.

Let’s start with the most important reason I think SEG is so interesting: valuation. SEG spun off with ~5.58m shares and will pursue a rights offering backstopped by Pershing that will see them issue another 7m shares at $25/share (see p. 29 for share counts), so the market cap looks like this:

SEG has no recourse debt, though they do have a small preferred and some mortgage like debt on their Las Vegas Ballpark and 250 Water Street….

Those mortgages are non-recourse (see P. F-17 of the spin docs), so I think the proper way to think about them is to ignore them when calculating the EV, which means at current prices and on a post-rights offering basis, we’re paying $130m for all of Seaport’s assets ($315m market cap less ~$185m of cash less preferred post rights offering).

That seems crazy to me. Again, the Seaport is a disaster, but if you scroll to p. F-62 of their spin docs you can see they’ve spent over $1B at the Seaport…

….and there’s value elsewhere in the organization! For example, SEG bought out their partner in the Aviators (Las Vegas AAA baseball) for an implied value of ~$33m in 2017, and the Las Vegas Ball Park cost $132m to build. Net out the $42m of ballpark loan, and there could be more than $130m of value to SEG just at the Vegas baseball assets.

FWIW I’m a little skeptical stadium assets are worth cost… but HHH has previously suggested stabilized NOI is ~$9m, so combine that with the value of the team and there is definitely some equity value over and above the loan here.

There’s also probably some value in the Jean-Georges equity stake (purchased for $45m plus another $10m for warrants for an all in price of $55m; impaired down to ~$14m of value on their books now) and the fashion show rights.

And, while Seaport has been a disaster, even within Seaport I think there are buckets of clear equity value that don’t require a full turnaround. Consider, for example, Fulton Market. This is a three story ~115k square foot building that is fully leased out: the bottom floor is Lawn Club (SEG owns an equity stake there; it’s on the books for ~$5.5m, opened in October 2023, and was slightly profitable in Q2’24 (see p. 10), so there’s probably some value in the JV too!), the second floor is iPic (which has a lease running through ~2036; per the 2023 investor day “iPic is open and running, doing very well”), and the third floor was just leased out as the Global Fashion Headquarters for Alexander Wang. The company’s disclosures don’t make clear what the building is earning (and historicals would be meaningless anyway; Lawn Club opened in late 2023 and Wang didn’t start paying rent till the end of 2023)… but what’s a mixed use building that’s fully leased for 10+ years in NYC worth with no debt against it? Again, the rent terms will really matter, but there could easily be tens of millions of value in that building alone.

Put it all together, and you could argue you’re paying nothing for the Seaport at current prices, or perhaps you’re paying <$50m for it if you want to factor in a few quarters of cash burn and be a little more conservative on those other assets.

And I think that’s simply too cheap / too much of an option to pass up; while Seaport has been an abject disaster, I think management has several levers they can pull in the very near term to improve economics. If you talk to the post-spin management team, they’re pretty clear that under HHH SEG was run by real estate people who were really focused on development and leasing out… but the assets really needed to be run by people with more familiarity with entertainment, and their entertainment background / focus gave them lots of levers to pull to improve profitability.

Obviously every management team at a turnaround pitches something along the lines of “those old guys just didn’t have the right background / strategy, but this is right down the middle for our skill set,” so take it with as many grains of salt as you want (though in this case I’m not even sure if HHH management would disagree with that assessment; here’s what the CFO said at a recent conference…

And let's be honest, I mean, the Seaport has a concert venue, a baseball stadium, a lot of restaurants. It's a combination of retail experience, sponsorship business, entertainment, we build cities, and we're infrastructure people. We're development people, we're leasing people. A different management team with the right experience can make a lot more out of Seaport than we ever could. And we believe this is going to be accretive for both of us. Mathematically, it's going to be accretive to us right away, because we're going to get to trigger $120 million of operating losses, [ well ], the cash effect of operating losses inside the Seaport.

…. plus in this case new management can at least point to several specific items that they can improve right out of the gate. For example, the simplest lever I heard related to the Rooftop at Pier 17, a popular music concert venue.

Right now, Seaport bills concerts at the Rooftop as part of the “Summer Concert Series”. The reason for the “summer” is simple; the weather is too cold in the winter to run concerts. New management plans to buy a tent to cover the space in the Winter, and then they can run concerts (and/or events) during the Winter months too. A very small investment to leverage a huge fixed cost / asset (to say nothing of the added traffic that could drive business across the rest of their assets; i.e. the foot traffic from 10 extra winter events should have positive impacts on the Tin Building, the Historic District, etc.).

That’s a very small example of an improvement lever. And perhaps that one won’t work for some reason! But SEG has a variety of different levers to pull to improve profitability; for example, the Tin Building is a cash inferno right now. To simplify, the Tin Building is a high end food court (think Eataly; here’s how Ackman described the Tin Building vision , “We're going to build a food hall that's going to rival -- that going to make Harrods look like a local supermarket…” so maybe they’d be insulted to hear me say that, but I’ve been to a lot of food courts and I can promise you Tin Building doesn’t put any of them to shame or anything) with six full-service restaurants (and a bunch of other stuff). My understanding is that each restaurant is operating effectively with its own logistics (its own kitchen, general manager, operations, etc.). If the Tin Building was a huge success, perhaps that would be a small cost to pay to deliver outstanding levels of service…. but, again, the Tin Building is a cash inferno with no sign of slowing down right now. Consolidating kitchens and other “back end” type work at Tin Building would quickly bring down operating costs and cash burn with minimal impact on customer experience, and I believe there’s already been progress there with more to come (HHH’s Q1 call- “Including equity losses of $8.9 million primarily from the Tin Building, total Seaport NOI with a loss of $17.5 million in the quarter. Although these losses remain sizable, the Tin Building did see improved financial results, both sequentially and year-over-year. Significant changes in the operating platform, which have been implemented by Jean-Georges in consultation with Anton and his team are yielding positive results and contributing to enhanced efficiencies and reduce costs. With more changes to come, we expect further improvements going forward”)

So, bottom line, SEG’s stock at current prices is offering the opportunity to buy a completely unique set of assets that have already had $1B spent on them for effectively free. Yes, the cash burn is enormous… but, post rights offering, the company will also have an enormous cash balance so they’ll certainly have the liquidity to try to stabilize, and they have multiple near terms levers they think they can pull to stabilize in the near term.

Ok, at this point, hopefully I’ve established that SEG checks a lot of the boxes for unloved spin-offs with massive upside potential:

• Hairy assets with a messy history and awful historical financials
• Likely forced selling in the spin: HHH spun one share of SEG for every 9 shares of HHH you held; at that ratio, you get SEG shares worth ~5% of your HHH holdings, and you’d need to come up with some more cash to fund the eventually rights offering. I know a lot of HHH shareholders; at this point, I think all of them were in universal agreement they wanted SEG gone so they could focus on the core business.
• Assets that had been mismanaged and can been improved: The Seaport assets have clearly been underutilized / mismanaged inside of HHH. Whether the new team can turn it around is, of course, another story!

The last piece of the spin off with upside “puzzle” is a management team positioning themselves to capture a lot of upside if they can get it to work. And here I think SEG checks all of those boxes in spades.

The first place to start is probably with Ackman. He’s backstopping this rights offering; if you believe in the upside of SEG, doing a backstopped rights offering in a hated spin is a very clever way to maximize your upside exposure. I’ve included some links to Ackman talking about the Seaport assets throughout this article; it’s clear he’s been a big believer and wildly wrong to date…. but he’s also been involved in these assets for a long time, and I have to believe he’s got some idea / different avenues in mind for value unlock / realization to put a check this (potentially) big into a backstop.

But let’s talk about the management team and their incentives. SEG’s CEO is Anton Nikodemus; he comes from running City Center at MGM. That is not a small gig; City Center is controlled by MGM so we can’t see current financials…. but MGM bought out their partner in the City Center JV for $5.8B back in 2021, and they disclosed City Center had done $283m in TTM EBITDAR in August 2021 (which wasn’t exactly a robust time for gaming….). Just to highlight how big this asset is, consider this quote from their earnings call when they closed the deal, “Led by Anton Nikodemus and his team, the CityCenter joint venture reported quarter-to-date ended September 26, adjusted EBITDA of approximately $120 million, with 40% margins. Had CityCenter been consolidated for the full quarter, our Las Vegas Strip EBITDAR would have been approximately 22% higher than what we reported in the third quarter. Its magnitude and growth potential makes CityCenter a difference maker for us financially.”

So that’s a pretty impressive background, and I’d guess he was very well paid at MGM (his pay is not disclosed in MGM’s proxy, so I can’t fully back that up, but I’d guess he was making $3-5m/year). I’d have to imagine to leave a job like that for a turnaround like SEG, he has to see huge upside at SEG. And he’s certainly positioned himself to take advantage of that upside. Right after SEG spun, Anton was granted a $10m equity package (per this 8-k); that was split between 126k shares of RSUs, 206k 10 year stock options with a $26.36/strike, and another 241k 10 year options with a $39.54/share strike. I am not 100% sure how those options / RSUs will adjust for the rights offering; let’s ignore that for now (I would assume the options / RSUs adjust to pretend he had executed his rights. If that’s the case, he’d be exposed to another ~1.2 shares of stock for every share I just listed, so his upside exposure would be even greater than I’ve detailed here). Let’s pretend Anton is convinced he can get this pile of assets to be worth $1B in a few years (i.e. less than the cost sunk into Seaport); if that’s the case, SEG would be a ~$100/share stock (on a post-rights basis), and Anton will have positioned himself to make $50-100m (the lower end if you believe those options don’t adjust for the rights; the higher end if you think they do so he gets even more exposure than this contract would have you believe!). Not bad…. and, of course, Seaport is still a very unique set of assets; he could believe there’s much further upside from there as they pursue further development (if you believe the “a district is a flywheel” line of thinking, then the upside to Seaport would be much higher over the long term if you can get these turned around…).

Hopefully I’ve hit every point to show why I think SEG is an attractive spin. Before wrapping up, I want to briefly address the rights offering dynamics and how (I think) it will play out.

As I’ve mentioned, now that SEG is spun they’ll pursue a rights offering at $25/share. This offering is backstopped by Ackman / Pershing in full, so it will hit the max amount of cash raised. We don’t know the exact details yet, but the backstop agreement ends October 25 so I’d expect the offering to commence and wrap up in the pretty near future. The way the rights offering seems set to work is that for every one share you own, you can subscribe to ~1.25 shares in the rights offering.

I think that creates an interesting dynamic; right now, SEG is small and illiquid…. but if you’re a fund willing to think this through and you think SEG is attractive, you can put on a small position now and massively increase your position through the rights offering. And, post rights offering, SEG will be large enough that it’ll likely qualify for some indices, so liquidity could increase even further.

From a technical / trade perspective, I also think that creates really interesting risk/reward in the near term. The stock is trading right around $25…. it’s hard to imagine it going much lower, because if it does everyone can just forgot the rights offering and Ackman will cover the full back stop, putting in an enormous amount of money at $25/share. Yes, the stock will be illiquid on the back end since Ackman will control so much, but it’s hard to imagine it going much lower simply because you’re already buying the Seaport for about free…. if it goes any lower, the market will be pricing it below the cash that Ackman is pumping in!

On the other hand, if the market starts to get excited about the company for any reason (positive news on an asset, management comes out with a vision to cut cash burn, etc.), then the stock could work really well in the short term as investors position themselves to get in now and get access to the rights offering (which will let them dramatically increase their position in a unique way).

Perhaps I’m imaging it…. but the technical dynamics of buying something just at or below the rights price for a fully backstopped rights offering that will pump more cash into the company than its current market cap certainly seem interesting / gameable.

If you dig into each of these assets, I think you could paint / see some upside at each of them with a little looking. I’ll end this article with a look at most of SEG’s major assets with some history and upside potential. But I actually think diving too deep on any particular asset misses the point here: the market is giving no value to Seaport. It’s basically assuming Ackman / Pershing are lighting their $175m backstop on fire for the privilege of getting SEG off of HHH’s balance sheet / getting the chance to pay a big premium to take HHH private. I think that’s way too pessimistic; everything about Seaport screams classic spin dynamics, and there are multiple shots on goal to deliver huge upside (in particular, I’d call out the 250 Waters asset as a source of near term potentially optionality).

Odds and ends

• This 8-k noted the CFO and GC are having their LTIP shares struck at the SEG spin price (“the Amendments with Mr. Partridge and Ms. Fato specify that the number of shares subject to the 2024 Annual LTIP Award will be based on the volume weighted average per-share price of Seaport Entertainment common stock trading on NYSE American over the 5-day trading period commencing on the date immediately following the Distribution Date (the “5-Day VWAP”); that’s generally a bullish sign (it means the execs think the stock is going up and quickly, and they have no need to sandbag numbers or slow play stuff with investors while they wait to get their equity struck).
• The big bear cases I have heard on SEG is “Seaport is a disaster” and “they will waste all of the money they are raising.” I absolutely understand both points…. but, on the former, it’s not like SEG is spinning with a ton of debt. They’re spinning with a net cash balance and there’s clearly value at some of their assets! On the later, worries here generally involve management spending an insane amount developing 250 Water, trying to lease out the remaining assets, or going on some crazy merger binge. While reminding that management should be pretty incentivized here and the ultimate belief has to be that an incentivized management team won’t do anything stupid / the bar here is pretty low given the valuation, I’ll try address each of those points:
  • Management has been pretty clear with me they won’t be developing 250 Water on their own. To back that up, they’d note that their background isn’t in development, and even post-rights raise they wouldn’t have enough money to fully develop the asset. I think that’s pretty bullish, as monetizing 250 Water could be a nice catalyst for the stock.
  • It’s hard for me to believe that SEG could spend so much on tenant improvement that they’d be leasing at negative NPVs…. but I guess anything is possible?
  • Management has been pretty clear with me that they would like to acquire in the longer term. I’d probably rather them go the other way (stabilize SEG and sell the whole company), but I don’t think it’s the end of the world as long as they get SEG stabilized / get their currency in order first. I’m comforted by Ackman’s position here; while it won’t be one of his largest positions, he’ll still have quiet a bit of skin in the game post-rights offering and I’d guess he’d easily be able to veto / block any M&A that came with materially negative NPV.
• Obviously Seaport has been a disaster / HHH has been dead wrong on SEG, but FWIW in their 2023 investor day HHH was suggesting their NAV valued SEG at cost but with “meaningful” future potential upside.

• There is one other interesting angle to the spin: by spinning Seaport, apparently HHH unlocked ~$120m of tax assets. That’s a meaningful amount; SEG’s market cap is barely above that! So even if you think everything in this article is wrong and HHH would have loved to keep this internal, that tax shield alone was a pretty powerful reason to spin! (below from HHH’s spin presentation)
• How much of a disaster has the Seaport / Tin Building been? HHH blamed weather for poor performance there four quarters in a row! I’m not sure I’ve ever seen that before!
  • Q3’23: Year-over-year performance was impacted by the closure of restaurant concepts, fewer private events and poor weather conditions. In September alone, New York received more than 14 inches of rain, with more than 50% of peak Thursdays to Sunday periods affected, including 60% of Saturdays and 75% of Sundays.
  • Q4’23: Although improved $2.4 million year-over-year, primarily due to reduced equity losses at the Tin Building, performance from our wholly owned businesses declined as a result of poor weather conditions and lower restaurant revenues
  • Q1’24: Seaport operating results remained challenged, generating revenue of $11.5 million, which reflected a modest $395,000 year-over-year reduction. The decline was primarily associated with poor weather and lower foot traffic at our restaurants as well as a decrease in sponsorship
    • this call did have a small ray of hope: “Although these losses remain sizable, the Tin Building did see improved financial results, both sequentially and year-over-year. Significant changes in the operating platform, which have been implemented by Jean-Georges in consultation with Anton and his team are yielding positive results and contributing to enhanced efficiencies and reduce costs. With more changes to come, we expect further improvements going forward.”
  • Q2’24: “I think that some year-over-year headwinds we've seen have been weather-related”
• I wanted to mention the weather call out above because, in the medium run, probably the biggest swing factor for how this investment performs is what the company does with the Tin Building / how they address it. Below is SEG’s 2023 segment EBITDA from their spin docs (p. F-57); if you just looked at the Segment’s you’d think the company was in fine shape….

• … but a big piece of what is happening is SEG reports Tin Building revenues in the landlord segment but the losses from the Tin Building in the unconsolidated equity segment, and the Tin Building is burning an enormous amount of money (below from HHH’s 10-k). Stabilizing that will be a huge key to this investment.

A bit more asset detail / some assets I haven’t discussed

Fulton Market

As mentioned in the write up, I find this building interesting because it’s fully leased on pretty long term leases. I find the company’s individual disclosures pretty poor, so it’s hard to value this building as its overall results get rolled into landlord operations with Pier 17 and Tin Building. However, we know the Alexander Wang lease started in Mid-December 2023, and their spin docs note that lease drove “a $1.1 million increase in rental revenue,” so it seems that lease alone is ~$4.4m/year in revenue. The lower floors of that building are leased to iPic and Lawn Club; I could not find the leases for them, but they lease ~the same amount of space as Wang, just on lower floors. For the sake of argument, assume their leases are on the same terms as Wang (probably conservative, a lower floor should get more, though iPic was leased years ago when the district was just starting up so they may have gotten a sweetheart deal to kickstart the district). That would mean Fulton is a fully leased up building with $13m/year in contracted revenue. That’d be very high margin revenue; I don’t think it’s crazy to think that building is throwing off ~$10m in NOI. What’s the worth; $100m? More? Obviously there are enough assumptions and simplifications to drive a train through there, but I point it out because this is an unencumbered building that is easily monetizable (either through a sale or, more likely, a mortgage so SEG can retain control of the building and district), and we’re paying absolutely nothing for it at current prices.

One more note on Fulton: One question I’m trying to answer is if it could be sold free and clear from Seaport. I’m not 100% sure the zoning requires it to be owned as part of the district; however, either way there should be value here as even if it couldn’t be sold at worst you could design an ABS-style mortgage onto the Fulton Market to crystalize value.

250 Water Street

250 Water is probably the most interesting asset in terms of near term upside. HHH acquired it for $180m back in 2018. If you look at p. 111 of their 2022 10-k, they were carrying it at $242m, but they wrote it down to ~$96m in 2023. Again, Seaport’s been a disaster, so there’s a lot of reasons for that write down… but two major ones for this particular asset is they were embroiled in a huge lawsuit to stop development and the delay in development made it seem like they weren’t going to qualify for the 421a tax program (mentioned here and here; just ctrl+f 421a). Since that write down, HHH won the lawsuit (allowing them to proceed with development) and got grand fathered into 421a… so it’s very possible 250 is worth significantly more than what it’s on the books for. Fully developing 250 Water will probably cost ~$1B (this article listed it at $850m); that’s money SEG obviously doesn’t have, so I wouldn’t be surprised to see them sell or JV the property in some form in the near future, which could be a quick value unlock for the stock.

• How big could the unlock be? I honestly have no idea; I’ve tried to a few different real estate people and the answers I’ve gotten are all over the place. But the company is carrying it on their books for $96m and it has a ~$61m mortgage on it for ~$35m of equity value. Imagine they sold the project to a developer for exactly that price; I’d have to guess the equity would go crazy. That would be the majority of the (non-recourse) debt going away and a major cash infusion (~$7/share pre-rights offering; ~$3/share post rights offering) to an already cash rich balance sheet. More than that, it would prove there is some value in some of these assets, and investors wouldn’t have to worry about SEG spending all of their money on development. Plus SEG would be able to crow to investors “yes, SEG is tough now…. but 250 Water has always been a huge piece of the plan, and when it fills up and brings in thousands of residents and jobs, it will start the distracts flywheel up.”
• But here’s the craziest part: it’s not like HHH was incentivized to be casual or cute when they took that big right off last year. I’d argue the $96m was probably a rock bottom valuation, and between 421a and winning the lawsuit, things have markedly improved here. Again, I can’t speculate on a value, but what happens if SEG does something with 250 waters that comes in at a value above where they have it marked….

Fashion show mall air rights

SEG owns 80% of the air rights above the Fashion Show (Brookfield owns the other 20%). I have to imagine these are worthless; SEG has held them for >10 years with no success. But there is a lot of development in Vegas, and eventually someone may want to pay something to develop these and my understanding is they cost basically nothing to hold on to. So free and very small options…. and SEG’s CEO obviously has a history with Vegas, so perhaps I’m too pessimistic / he’ll find some way to monetize these.

Tin Building

The Tin Building is a historical landmark that HHH partnered with Jean Georges to basically turn into a high end food court.

Look, the Tin Building is really nice… but I will put it bluntly: the biggest risk factor to SEG is the fact that there are people involved here who were involved in approving the Tin Building and letting the operations get this out of hand. HHH sunk $200m into the Tin Building, and despite being open for two years at this point (and thus being well seasoned), it continues to light cash on fire with no signs of slowing down. (This Tegus call with HHH’s former CEO puts it interestingly: “Seaport was a very nice dream, and you had the previous CEO before me, love New York. He loved fancy restaurants and he's a good friend. I haven't talked to them a long time, but and I mean this respectfully, he was just very flashy. He loved the image. He literally would tell us that he was the visionary of the company. And I would remind him that he's CEO, and he said, "Well, I know I'm CEO, but I'm really the visionary and everybody else needs to do the work”. It's like, okay, that's bullshit. And then you had a Board of Directors that 90% of them were Manhattan based. In the Manhattan Board of Directors, they absolutely wanted to do something super special in fancy at Seaport)

And I’m not saying “this was an insane project” with hindsight bias; investing $200m into this was insane at the time. This grubstreet article signals it up nicely: “With a price tag a little below $200 million, it is arguably the single most expensive and ambitious dining project in the history of this restaurant-mad city.” (This NYT article is worth reviewing as well; both are dated but I’ve been to the Tin Building several times in the past month and I can promise the reviews hold up well).

Here’s what I suspect happened: the Tin Building was hopelessly delayed, first by issues with constructing a project of this scope at a landmark, and then by COVID. Given those delays, everyone at HHH was hoping that the project would miraculously work… but when it didn’t, no one at HHH wanted to own up to it and force discipline on it. With no one at HHH who had the incentive to take full ownership, Jean-Georges was allowed to continue to run it according to his vision without regard to cost or return or how many millions were being lit on fire.

The good news is this “lack of ownership” problem is exactly what a spinoff is designed to solve. New management should be very incentivized to bring the Tin Building under control in the extremely near future, and I’d have to imagine it won’t be crazy hard to at least stem the bleeding. The management agreement for the Tin Building was filed as part of the spin docs; I think it’s pretty clear SEG has multiple outs in 2025 (or they could just force the issue by refusing to fund further losses). A new operator would almost certainly bring costs under control with some basic blocking and tackling; I mentioned the multiple kitchens / GMs / infrastructures in the main article, just fixing that would likely save millions a year.

So the Tin Building is obviously the biggest problem child… but one way or the other I expect the cash burn will come down markedly in the very near term.

Pier 17

Several assets here (including the concert venue), but the one of most note is really the office space. It currently has two tenants and a heck of a lot of empty space; that will almost certainly change to one tenant in late 2025 as ESPN seems certain to move out.

From HHH’s 2023 investor deck

HHH has been trying to lease that 88k of vacant space for a long time; here’s them talking about it all the way back in their Q4’18 earnings call:

We have approximately 86,000 square feet of prime office space remaining. While it has taken us longer than we would have like, we've had very robust demand from a number of potential users and have been in active negotiations with the same potential tenant for the majority of the remaining space for several quarters.”

If you believe the company, they’ve almost signed a big lease for the space multiple times and then gotten left at the alter (from their 2023 investor day):

So yes, there is some worry on the “what happens when ESPN leaves” front. But if you talk to SEG’s current management, they’d argue ESPN leaving is as much opportunity as risk; ESPN doesn’t have a lot of people in the office here (they’re renting a huge space but it’s a TV production studio, so the number of employees is way lower than if you were renting it to, say, an accounting firm), so the area won’t suffer much foot traffic decline when ESPN vacates. By reclaiming the box, SEG can look to release it to something that will not only pay rent but drive more foot traffic to the neighboring assets (creating a mini-flywheel). If you ask SEG management why HHH didn’t already lease the 88k feet, they’ll again point to HHH’s background and note they were really only talking to people about leasing it out as an office and not considering experiences or other things.

Historic District

This is basically a private street that SEG owns / controls (note that this street includes the Fulton Market Building, which I’ve also called out separately). It’s up to 75% occupancy now. I’ve been several times; I can’t claim to be an expert but I think it’s a nice set of assets. It feels a little under frequented (I went one Saturday night and it was a lot less busy than you’d expect for a summer Saturday night with perfect weather)…. perhaps with a little more seasoning and a little more occupancy, it gets really humming.

Jean-Georges

Seg owns 25% of Jean-Georges. They paid $45m for the stake. There’s almost no way the stake is worth anywhere close what they paid for it…. but it’s worth something, and if they break the Tin Building lease perhaps they turn around and monetize the stake.

Catalyst

Completion of rights offering

Bringing Tin Building operations in line

Monetizing 250 Water