Description

Executive Summary:  Seritage Growth Properties “SRG”, a former Mall REIT, went into liquidation in March 2022.

• The Company has already sold 87% of its portfolio, utilizing the cash to reduce its term loan from $1.44B to $280M.  Once the term loan is fully paid, asset sale proceeds will be diverted to the SRG 7% Preferred Equity.

• Unsold real estate is estimated at values of $500 - $750M versus $200M in net debt and $70M in SRG 7% preferred par value, making the preferred repayment a near certainty.  This does not include $140M of in-process real estate sales which should convert to cash over the following two quarters.

• At current market prices ($20/share), the $1.75 / share dividend provides an 8.75% running yield. Assuming 1-year to takeout ($25 par value), these securities would generate a 34% return.

• The $300M+ in market cap bolsters confidence in repayment while providing a directly hedgeable instrument.

• Between asset sale announcements, debt paydown announcements, and earnings releases that provide significant disclosures into the sales pipeline / residual real estate value, there are sufficient catalysts to expect the market to revalue these securities over the next 6 months.

Given asset coverage, fundamental downside risk seems limited.

• The real estate portfolio would have to lose 75% of its value before the preferred equity is impaired.

• Returns are sensitive to the cadence of asset sales and cash burn.  However, even at a modest $55M/quarter of assets sales, which would be a 72% reduction from the historical results achieved to date, and assuming current cash burn rates, which have been consistently decreasing as debt is paid down and costs eliminated, the preferreds would still be paid back within 1-year.

• Given the proportion of the return attributable to the $5/share pull-to-par, annualized returns decrease to 24% if the timeline is extended to 18-months, providing a reasonable downside case.

The sources of the mispricing are easily identifiable.

• Liquidations are generally underfollowed situations as investors prefer going-concern businesses.  The analysis required for these special situations is outside of most investors’ mandates and comfort zones.

• At $650M, the Company’s enterprise value is small, further contributing to its underfollowed nature.  Additionally, investors wishing to play the liquidation have generally gravitated toward the more liquid common shares, enhancing the dislocation across the capital structure.

• Information is limited. Management does not host conference calls and is generally reluctant to talk to stakeholders.  There is only 1 sell-side analyst covering the situation.

• Missteps in communication, specifically in overestimating the value of the real estate, has led to broad frustration and distrust in management.  The most recent earnings release, which reduced future gross proceeds estimates by 40% was the final straw and led to indiscriminate selling across all parts of the capital structure, despite the very different risk/return profiles of common and preferred shares.

Since the May 16th sell off, the SRG Preferred equity securities have become more actively traded.  Two institutional investors have filed 13Gs, the larger of which has built a nearly $6M+ position making the idea actionable for smaller investors.

Company Overview:  Seritage Growth Properties (“SRG”) is a REIT formed in 2015 through the spinout of the legacy Sear’s stores.  In March 2022, SRG converted from a REIT to a taxable corporation with the plans to fully liquidate the portfolio.  At the time, the Company had a portfolio of 161 properties and an outstanding Term Loan balance of $1.44B, which has been reduced to 21 properties and $280M of TL currently.  The remaining assets are situated in highly coveted locations including Miami, Santa Monica, San Diego, Austin, and Dallas.

Real Estate Portfolio:  The unsold real-estate portfolio consists of consolidated and JV properties highlighted below.  The most valuable properties are Aventura/Miami, Santa Monica, and San Diego.  Boca Raton, Dallas, Redmond, the two Austin properties, and Alexandria are the next largest sources of value.

Capital Structure, NAV, Cash Flow Estimates, and Timeline:  The past 3 earnings releases included:

• A breakdown of the current capital structure

• A breakdown of sales that have occurred subsequent to quarter end and in various stages of in-process sales

• TL principal payments since quarter end

• A property-level estimate of expected proceeds from sales for any properties not currently in-process

Once the in-process sales convert to cash, SRG will have $58M of net debt before the $70M of preferred equity begins to receive payments.  In other words, we are very close to the point at which cash flows switch from debt repayment to preferred payments.  The updated NAV snapshot provided by the Company implies $610M - $810M of real estate value.  In other words, the Company’s estimates would have to be so far off that the properties are worth less than 20% of the estimated value before the preferred equity is impaired.

The above analysis does not account for time or cash flow dynamics.  The longer it takes to sell the properties and pay down debt, the more cash the Company will burn on operations and interest expense.

1. Pipeline Conversion:  Changes and lack of specificity in disclosures over time make it difficult to ascertain the exact timing of the flow of assets through the sales funnel (accepted offers�under contract�sales).  Subsequent sales immediately convert in the following quarter.  I believe assets under contract convert to sales/cash partially in the following quarter and partially two quarters out.  Finally, a small portion of accepted offers convert into sales, but all accepted offers should at least move into under contract within 2 quarters.
   
   

2. Cash Flow Dynamics:  Below is a recast / simplified cash flow statement.  The liquidation began in Q2 2022. 

   1. Asset sale proceeds are chunky ranging from $44M to $314M per quarter.

   2. CFO has averaged about -$19.7M since liquidation started.  The Company includes interest expense in this line item, with a large portion of the decline resulting from debt repayment.

   3. Investment in real estate has also been in decline.  Management claims this resulted from the build out of Aventura and will now decline dramatically. 

3. Cash Burn / Asset Sale Cadence:  The key input to estimating cash burn is the cadence of asset sales.  Since the beginning of liquidation, SRG has averaged $196M in asset sales per quarter.  While the last quarter was particularly low, the subsequent quarters will almost certainly be substantially higher given the announced sales pipeline.  A base case of $80M in accepted offers per quarter seems reasonable and would result in $47M in additional cash per quarter available for debt paydown. 

The key tail risk is that asset sales slow to such a pace that the Company burns through the cash.  I do not believe this poses a material risk to the preferred securities, but rather is more relevant for the common shares.

4. Given assumptions on sales pipeline conversion, new accepted offers, debt paydown, and cash burn, an investor can forecast a snapshot of the liquidation at any future point in time.  The key takeaway is that at some later date, there will be sufficient sales in the pipeline (subsequent sales, under contract, accepted offers) to make preferred payment undoubtable resulting in the market repricing these securities.

The below highlights a hypothetical Q4 2024 earnings release, which would be announced on March 14, 2025.  Assuming an average of $80M in accepted offers per quarter (40% of the historical levels), the balance sheet would show -$51M of net debt versus $70M in par value of preferred equity with $116M in pending transactions.

The above could be conservative and the Q3 2024 release may be sufficient to reprice the market.  Additionally, the term loan matures on July 31, 2025.  While it is possible to get an extension, the Company has been focused on paying this off.  It is highly likely that the Company sells a sufficient number of properties to eliminate the term loan by that date.  This implies $70M in payments per quarter or slightly below the historical average of $74M/quarter and is probably more representative of the downside case.

Proxy Valuation:  In July 2022, the Company issued a proxy in relation to the Company’s conversion to a liquidating trust.  The proxy filing included a detailed analysis of the Company’s NAV and asset sale timeline including:

• Distributable Proceeds:  The Company estimated that after all fees and expenses, common shares would receive $18.50 - $29 / share in distributions.  This was based on a detailed analysis by advisor CBRE Group.

• Timeline:  The Company estimated that sales would be completed 18 – 30 months after the plan was approved implying distributions between September 2024 and September 2025.

• The gross asset sales proceeds range was estimated to be $2,848,035,000 to $3,557,999,000.  This was determined as follows:

  • Residential Assets:  Third Party Appraisals

  • Non-Core Assets:  Bona fide offers, appraisals, existing purchase agreements, letters of intent, in-process negotiations, and broker opinions of value.

  • JV Interests:  In-process negotiations and third-party appraisals

  • Multi-Tenant Retail:  Barclay’s and CBRE asset-by-asset NOI/cap rate valuation

  • Premier:  Model-based asset-by-asset assessment from third party brokers and valuation services

• Other Assumptions:  56,032,381 shares

[I believe the assumptions above were likely aggressive at the time.  A more reasonable range of value would have been $10 - $12/ share with distributions beginning about 18-24 months after the start of liquidation and a tail extending at least 3 years into the future.]

Market Mispricing / Source of Dislocation:  Liquidations are generally underfollowed situations as investors prefer going-concern businesses and these special situations fall outside of most investors’ mandates and comfort zones.  This specific opportunity is relatively small, further contributing to its underfollowed nature.  Finally, management does not host conference calls and is generally reluctant to talk to either sell-side analysts or investors.

In addition to the above, there are two specific items worth noting that contribute to the mispricing.

1. The Company was overly aggressive in estimating liquidation value.  In fact, shortly after the proxy was released, the Company stated the high end of the range was no longer reasonable and that the low end ($18.50 / share) represented the most likely outcome.  Investors, who relied on Company guidance to “set the spread” have been frustrated by future impairments and constant revisions toward a more accurate fair value.  Following the latest adjustment in Q1 2024, investors gave up and dumped all securities indiscriminately.
   

2. The market has systematically mispriced new information in this name over time.
   

• July 2022:  The proxy detailing an estimated equity distribution of $18.50 is released.  The stock price jumps 80% from $6 to $11, implying a 22% discount rate.   At the time, my estimated distribution for the equity was $12, which applying the market discount rate would result in a $7.11/share fair value stock price.  The Company has overestimated its distributions by 54% resulting in an elevated stock price.

• August 2022:  The Company takes its 1st impairment, implying the final distributions will be 11% lower than initially expected.  The stock shockingly increases 28% from $12 to $14.  Utilizing a 22% discount rate and an adjusted Company estimate of $16.55 would yield a fair value of $9.80.  In other words, despite the negative news, the market tightens the discount rate from 22% to 6%.

• August 2023:  The Company takes its 2nd impairment implying the final distributions will be 13% lower than previously expected.  This time the stock moves in the right direction and for the first time, prices an appropriate 20% discount to a more accurate $12 in distributions. 

• May 2024:  The Company moves its property level estimates down 40%.  Since the 2nd impairment, the stock has rallied 25%.  Upon this news, the stock falls 40% pricing in a 29% discount rate to the bottom end of the Company’s estimated NAV. 

Why should investors believe the latest property-level NAV estimate?  The short answer is that they shouldn’t and instead should perform an independent property by property analysis, similar to what is contained later.  However, there is reason to believe the current range more accurately reflects true fair value.

In liquidations, the balance sheet is required to be marked-to-market to the firm’s best estimates of realizable value. 

Is the balance sheet being accurately marked?

Q1 2024 Sales:  Disclosures in the last quarter were sufficient to triangulate which properties were sold at what price.  Disclosures in the 10-K allow us to identify the book value of those properties at year end.  Comparing the sale proceeds to book value allows us to gain confidence that the balance sheet is being marked close to actual realizable value.  The multi-tenant property was Watchung, NJ and was sold at book value.  The 4 non-core properties included North Little Rock, Cedar Rapids, Yuma, and Edgewater and were sold at 90% of book value. 

Overall Gain/Losses Vs. Impairments:  Finally, we can evaluate gains / losses on sales versus impairments over time.

• If the balance sheet is being marked conservatively, impairments should be offset by gains on sales.

• If the balance sheet is being marked accurately, there should little/no gains or losses upon sale.

• If the balance sheet is being marked aggressively, there should be losses on sales.

As you can see, the JV assets appear to be marked very close to their sale values while the consolidated properties appear to be marked conservatively.  I would exercise some caution as the majority of the gains are driven by earlier sales.  Nevertheless, it appears that Seritage is in fact accurately marking its balance sheet.

I’ve also included a sensitivity table to changes in real estate value.  If you exclude the cash on the balance sheet and assume all of this is burned (extremely aggressive), the real estate would need to be sold at a 42% loss from current marks before the preferred securities were impaired.  Including the cash, the preferred equity could sustain a near 60% decrease in real estate value before becoming impaired.

In summary, it seems likely the Company is accurately marking the balance sheet.  Utilizing book value would result in gross proceeds of 84% of the low end of the Company’s property-level estimates.

Portfolio Valuation:  Given the mix of vacant and leased properties, lack of detailed quarterly property level NOI disclosures, and inconsistency with industry metrics, forecasting a precise estimate for real estate value is difficult.
Below is an overview of previous sales data compiled from news and earnings releases since the liquidation began.  The left-hand side shows properties where a cap rate could be utilized to value the properties.  The right hand side highlights sales where a per square foot basis was disclosed (likely vacant).  There are an additional 6 JV assets which were sold but where either a price/square foot or total square footage was not available.

As of Q1 2024, ex-interest expense NOI for consolidated properties was $7.775M and the NOI for unconsolidated properties was $2.098M.  Applying the 7.1% cap rate from the above table results in a total real estate value of $556M.  This compares to $749M in carrying value of real estate line items from the balance sheet and the $610M low-end of the property level gross proceeds estimates.

The above analysis does not assign any value to vacant properties.  We have square footage for all but 3 vacant properties (Dallas, Austin, and Alexandria).  Applying the historical $65.68/square foot transaction price to the properties for which we have GLA yields an additional value of $82M, bringing the total portfolio estimate to $640M.  Alexandria is estimated to be worth $25M (see below) resulting in a total ex-Austin/Dallas of $665M.

While imprecise, the above gives us a starting point to evaluate a range of possible outcomes.  However, an investment in the preferred securities does not require a precise valuation.  The combination of this analysis, the Company provided quarterly estimates, and balance sheet should provide investors ample comfort on coverage.

Interest Rate Sensitivity:  Real estate value, particularly occupied properties, are highly sensitive to changes in cap rate assumptions.  A 100bps widening of cap rates from 7.1% to 8.1% would result in a 12% decrease in value.  A 200bps increase in cap rates from 7.1% to 9.1% would result in a 22% decrease in value.

Rent Rolls / Industry Dynamics:  Given this is a liquidation, resetting of rents plays less of a role in driving value.  However, it should be noted that in place rents were generally significantly below market and have been resetting upward. SNO (Signed Not Yet Opened) leases were 60% higher than in place leases at year end.  This is in line with industry dynamics as detailed below.

• Simon Property Group Q1 2024 Earnings:  SPG announced an increase in mall occupancy of 1.1% to 95.5% in the last quarter with average base minimum rent increasing 3%.  Lease momentum continues to be strong on the back of a 6% increase in sales per square foot, reaching an all-time high.  This combination of factors has led the company to increase full year guidance by 4.3% with the company citing strong tenant demand despite a cloudy macro backdrop.  Florida was cited as being particularly strong with California as improving.  Overall, they are very bullish over the next 2-3 years citing lack of new supply.  They have $11B in liquidity and would consider external opportunities at the right price.

• CBL & Associates:  CBL includes details on lease renewals for the next two years.  As shown in the table below, there are material increases commencing in 2024 & 2025 respectively.

• Unibail-Rodamco-Westfield:  The Company cited the following regarding the transaction environment: “After a challenging 2023 for investment market activity, investor interest seems to improve since the beginning of the year. The Group is currently in active discussions with potential buyers for more than €1.2 Bn of assets in Europe and the US.”

• Industry Supply:  The Mall asset class has been in secular decline for some time, culminating in the bankruptcies of CBL & Associates Properties in 2020, Washington Prime Group in 2021, and Pennsylvania Real Estate Investment Trust in 2023.  However, there is reason to believe that the industry is starting to reach an inflection point, as supply has come out of the market and is expected to continue (see chart showing IBISWorld data).  Furthermore, despite revenue declines of 4% annually between 2019-2023, revenue for the category is expected to grow at a 0.7% CAGR from 2024-2029.

Individual Asset Valuation:  The below is explicitly not a valuation of the full portfolio but rather highlights how just 4 properties can allow an investor to get comfortable with repayment of the preferred even if the residual 14 properties were valued at $0.  The 4 properties highlighted below, under stress assumptions, result in $291.5M in value.  As of the end of the first quarter, not accounting for any subsequent sales of which there are $141M, these 4 properties are sufficient to cover the net debt on the balance sheet and 1.3x the payment of the preferred equity.  Note that there are material assets including Boca Raton, Dallas, and two properties in Austin which are excluded simply because their value cannot be ascertained with the same level of extremely high confidence.

Aventura (Consolidated):  Aventura is undoubtedly the Company’s most valuable asset.  Situated 17 miles north of Miami and 15 miles south of Fort Lauderdale, the area is one of the most visited shopping areas in the country.  Below are some relevant quotes from a RealDeal news article dated July 25, 2022:

If Seritage decides it would sell Esplanade at Aventura, the property will be a “very well received asset,” said Douglas Mandel with Marcus & Millichap. “Aventura is one of the most affluent markets in the country, representing the high watermark for every asset class,” Mandel said. “Esplanade would be a highly, highly competitive deal, and the buyer for something like it would be global.

Esplanade at Aventura would probably sell for a price close to the $216 million New York-based RPT Realty paid for the Shops at Mary Brickell Village, an open-air office-and-retail center in Miami’s Brickell neighborhood. The deal for Mary Brickell Village closed this month.

While the property initially ran into construction delays, it is fully opened with approximately 70% of the 216K square feet of retail space leased and new leases signed every quarter.  Discounting the per square foot price indicated in the above quote by 20% would yield a value of $173M.  I believe this is the $150M - $200M Premier Gateway property mentioned in the Company’s property level estimates.

Santa Monica:  Seritage sold a 50% interest to Invesco in 2018 for $50M.  According to Zillow, home values (proxy) in Santa Monica are up 13% in the last 5 years implying a current market value of $56.5M.  The original $50M sale price was used for valuation purposes.  According to Urbanize LA, construction was completed in January 2024.

Alexandria:  The Landmark Holdings JV sold 11 acres to the City of Alexandria's Industrial Development Agency for $54M on November 23, 2021.  The IDA then entered into a 99-year lease with Inova Health Systems for the land.  This was the first step in a larger redevelopment project by which the mall will be converted into a mix of residential, retail, commercial, and entertainment offerings including a central plaza, parks, public spaces, a transit hub.  Demolition began in 2022.  The first buildings are expected to open in 2025 and will include 3 residential complexes with 1,117 units, a new office tower, and 215,000 square feet of retail space.  A May 23,2023 news update indicated that redevelopment costs increased 40% leading to a $62M shortfall of which the city has offered to cover $37.6M.  

According to news reports, office properties in the area, which I assume would have experienced the largest reduction in value, decreased 12.4% in 2023, following a 10% decline in 2022.  Utilizing the original sale price / acre adjusted for the decrease in value, and assuming an additional 11.2% decline in 2024 would yield a value to SRG of $24.5M.  I believe this is extremely conservative given the $3B in investments into the redevelopment.

San Diego:  This is the site of the Westfield UTC Mall, an upscale open-air shopping mall.  The parcel owned by Seritage (“UTC JV”) has been divided.  Portions of the space became Corner Bakery Café, Williams Sonoma / Pottery Barns Kids, Equinox Fitness, and Crate & Barrell.  The actual Sear’s building was demolished and a residential building called “The Collection” was built.

The JV was formed in May 2018 valuing the property, including costs to complete, at $165M.  Seritage sold it’s 50% interest for $44M in proceeds.  According to Zillow, real estate prices in San Diego are up a whopping 63% since the formation of the JV implying a current market value of $71.8M. I am utilizing a $44M valuation.

Additional Properties:  Please see the appendix for additional work on a handful of other valuable properties.

What are the right trading prices for the preferred and common equity?

Under the following assumptions:

1. The remaining assets are liquidated linearly over 2 years.

2. Cash burn averages $17.5M per quarter.

3. Distributions adhere to a strict waterfall.

4. Gross proceeds from not yet sold assets range from $500M - $750M.

The net distributable value to the equity ranges from $4 - $8 per share.  Utilizing the following discount rates would result in a fair value of the equity of:

7.5% discount rate = $3.28 to $6.86 equity fair value

15% discount rate = $2.74 to $5.83 equity fair value

40% discount rate = $1.63 to $3.66 equity fair value

We can estimate the right discount rate utilizing the market trading prices of risk-arbitrage spreads.  Safe deals trade at around a 7.5% annualized spread.  Medium risk deals trade at closer to a 25% annualized spread.  High risk deals trade at a 40%+ annualized spread.  Given the wide distribution and multitude of variables that affect the value, I would argue that the equity should trade at a high discount rate.  However, given how few variables need to be accurately predicted to ensure timely payment of the preferred securities, these should trade at a tight spread.

At current market prices, the market is implying a roughly 25% discount rate to the mid-point of the real estate value range for the equity but a 35% discount rate to the much safer and shorter duration preferred equity.  The below sensitivity tables highlight that point.

1. The left-hand tables lay out the economic scenarios.  The first table calculates potential cash burn and time to liquidate.  The second table uses the cash burn rate and a range of possible gross proceeds to calculate total equity distributions.  It seems reasonable to assume a liquidation will take 8 – 10 quarters at an average quarterly burn rate of between $12M - $23M.  Using the mid-point of the Company’s property level gross proceeds range would yield a value of around $7.50.  This analysis highlights an important and underappreciated aspect of the situation:  friction costs have a significant impact in reducing the actual cash common shareholders will receive by about 30%.  I believe this is one reason the equity consistently overpriced outcomes as investors do not appreciate the magnitude of the impact.
   
   

2. The right-hand tables translate these economic scenarios into security prices.

   1. The first table uses the gross distributable common equity values and applies a discount rate to arrive at a fair value.  The discount rate is gross and does not account for time.  For example, if the payments occur two years out, the annualized discount rate would be approximately half that shown in the tables.
      
      Immediately we can see the market is currently pricing the common equity to between the low end and the midpoint of the Company’s property level estimates and to a 25% - 35% gross spread.  Given the risks – uncertain timeline, lack of certainty around end payment amounts, market sensitivity of distribution value to economic conditions – relative to the pricing of other securities in the market, this seems aggressive.
      
      

   2. The second table utilizes the stock prices in the first table to generate fair value prices for the preferred equity.  Specifically, it utilizes the equity price to calculate a leverage level and translates the levered discount rate to an unlevered discount rate which is used to generate a price.
      
      Note:  Even under the draconian assumptions highlighted in red, whereby the equity distributions are much lower and the market discount rates are much higher, the preferred fair value is materially above current market prices.

I believe the above capital structure dislocation is the result of two factors.

1. Given the relative size of the two securities (~$56M preferred market value versus ~$300M equity market value), investors wishing to play the situation have gravitated toward the common equity, elevating its relative value.

2. Some call option on interest rates / real estate values, which is captured by the common shares but not the preferred, is being priced into the market.  This phenomenon can be found in other securities with similar factor risks.

Winthrop Capital / John Garilli:  John Garilli was appointed CFO in January 2022 and is essentially spearheading the liquidation process.  John is President and COO of Winthrop Capital Advisors, a real estate investment fund.  Prior to that, John was Chief Accounting Officer of Winthrop Realty Trust, a publicly listed REIT.  John is a real estate liquidation specialist.  Winthrop has brought him in 5 different times to do exactly what he is doing at SRG.  All 5 times he liquidated the portfolio quickly, at reasonable prices, and returned capital to shareholders.

Risks / Unknown:  As previously indicated, it was the dramatic reduction in property-level gross proceeds estimates that led to the most recent sell-off.  The reduction was concentrated in 2 positions.  Absent these two positions, and making my best assumptions to try and match up properties, I estimate that the rest of the portfolio only decreased in value by 2% - 4%.

As for the two positions mentioned above:

1. A Premier property in a gateway market with an estimated value of between $200M - $300M mysteriously disappeared.  My working hypothesis is that a large property was split into two lots, one of which was sold.

2. The range associated with another Premier property in a gateway market with an estimated value of between $200M - $300M was reduced to $150M -$200M.  This represents a 30% decrease at the midpoint.  I believe this is the Aventura property.  While substantial, as indicated earlier, I believe the Company’s ranges were already too high and this likely reflects a normalization of the estimates.

Extreme Risk:  There’s been a lot of discussion across investors since the last earnings call, most of which reflects extreme pessimism and a disgruntled view of management (ex: pay package).  While some of this frustration is valid, investors were clearly overly optimistic about the prospects of common share distributions which were always overstated.  Having said that, there is one extreme view of the preferred securities, which while I do not believe is a legitimate risk, should be noted.  The thesis is:

1. SRG will stop liquidating in favor of a full sale of the Company.

2. Someone will buy the Company for the tax losses.

3. The above triggers a CoC option for holders.

4. The CoC is worth the lesser of $25 and 1.26x common shares (substantially below current prices).

5. If you don’t convert, the buyer will stop paying the dividends on the preferred securities.

6. Holders will then be stranded with a non-paying security in a private company.

My response is as follows:

1. While the Company has indicated that they would consider an alternative to asset sales including a full Company sale and they have indicated in the past that there are tax losses which could have value, these comments have always been in the context of maximizing value for shareholders (i.e. Company has sold almost all the properties, is left with a tiny number of vacant, low-value assets, and consummates a full sale to avoid the burn, in the process securing some additional value for the tax losses).

2. The Company has stated in multiple filings, including the proxy to convert the corporate structure, that the preferred securities would be fully paid before distributions to the equity take place.

3. While I am not a legal expert, I believe trustees generally have and are exposed to differing standards of duty.  In my experience in bankruptcies, trustees for liquidating trusts have always been extremely careful to adhere to strict waterfall priorities.  It is possible that the corporate structure here differs, but I believe the general concept should hold.

4. In the context of today’s interest rate environment, 7% is not a high rate for long dated capital while showing a propensity to screw stakeholders could significantly increase a buyer's cost of capital or decrease their access to capital markets.  The trade-off seems poor for $70M of 7% securities.

5. John Garilli makes his living liquidating real estate assets. He has no incentive to ruin his reputation.

6. There are alternative protections.  The Company cannot make any distributions to common shareholders without first paying cumulative dividends on the preferred securities.

The above is not a full evaluation of options for preferred holders as I view the above scenario as extreme.

Finally, given the historical pace of asset sales, the preferred shares are likely taken out in a very short timeframe.  It takes time to sell a Company including hiring advisors, negotiating the sale, evaluating alternatives, putting together a proxy, soliciting votes, etc.  We are likely only a few quarters away from the Company accepting offers on a sufficient number of properties to fully cover these securities.  Once accepted, it is unlikely they would be unwound which means that by the time the deal is completed, the preferred equity has probably already been taken out.

Exhibit:  Sample Property Analysis Not Included Above

Redmond, WA (At Overlake Plaza):  This 15-acre plot is located 20 minutes from Seattle and is walking distance from Microsoft’s campus.  The area is part of the Sound Transit’s $54B expansion plan with a future light rail station planned 1 block away.  The property is conservatively worth $30M.

Redevelopment Plans (approved):  The redevelopment includes 3 residential buildings (500 units), 266K square feet of office space, a 210-unit boutique hotel, 100K square feet of retail, 62K square feet of restaurants, 23K square feet of market/food/retail, 2,245 parking spaces, and 2 acres of parks.  Demolition began in summer 2022 and groundwork in fall 2022.  The 443-unit apartment project is the scheduled to be built first. 

Transactions:  This specific area of Redmond has been quickly developing. 

• In July 2022, Blackstone bought national portfolio of business parks for $7.4B including Overlake Business Center consisting of 371K square feet across 24 low-rise buildings spanning 15 acres operating under Blackstone’s Links Park platform.  In September 2023, they filed a plan to redevelop 2.5 acres into 500 apartments in an 8-story building with retail and parking.  The original seller was PS Business Park, an arm of Public Storage which acquired the site in 2007 for $75.7M from a partnership of the Yett family.

• Capstone Partners:  Capstone spent $1.2B developing the Esterra Park project which includes 2K apartments, a hotel, office, and retail spaces, and a park.

• Capstone purchased the 28-acre Group Health Redmond campus for $32.5M in 2013 and planned to redevelop it into office, retail, and residential properties.

• Sterling Realty acquired a 101K square foot, 5.35-acre Redmond Technology Center for $38M.

• KBS bought the 106K square foot The Offices at Riverpark for $48M from Colony Capital.

• Ledcor Group bought 1.4 acres of land for $8.7M in 2018 and developed it into a 263-apartment complex it later sold for $130M.

• PGIM Real Estate bought 3.2-acre Block 2A/2B from Capstone for $14.3M in December 2019.

• Merlone Geier Partners bought the 6.1-acre Overland East Center for $41M in 2019.

Value:  Utilizing the sales in 2019 would yield a value of $84M for the property.  Assuming the lowest transaction price (Group Health Redmond campus) would yield $17.4M.  Note that property values are up 77% in the area since December 2019 which would yield values of $31M - $150M.

Austin Tech Ridge:  According to RD Management’s website, this site can accommodate 516,400 square feet of with current availabilities totaling 46,114 square feet, implying a 91% occupancy rate.

The site is located next to a I-35 with surrounding retail including a Walmart, Lowe’s, Khol’s, Home Depot, and JCPenney.  Apple opened an office park that added 5,000 new employees in 2022 and another office park approximately 7-miles away includes Google, Oracle, PayPal, Electronic Arts, Polycom, and Deloitte.  Population in Austin is expected to grow 4.4%/year over the next 16 years.

Current tenants of the location include:  Furniture Mall of Texas, Floor & Décor, Fitness Connection, Conn’s Homeplus, Ross Dress for Less, PetSmart, and Fresh International Market.

Catalyst

There are several catalysts including asset sale announcements, debt paydown announcements, and earnings releases.