Back in November, SMTA entered into a $165MM non-resource mortgage collateralized by the Shopko assets to put a floor under the valuation. That looks incredibly smart in hindsight as they mentioned in their press release today that they are "working with the lender under the non-recourse mortgage loan, including potentially to satisfy the loan by relinquishing to the lender the ShopKo Stores securing the loan." They're going to mail back the keys, and for the most part sit out the bankruptcy process (other than their $35MM term loan B to ShopKo, likely worthless but was instrumental in getting timely financial statements and might have triggered the mortgage financing transaction), they'll be rid of their ShopKo exposure in short order. As a result the company announced a process to explore strategic alternatives, so what's left? In my year-end post, I laid out an NAV of around $13 a share, that appears to be close with what the company disclosed in their presentation accompanying today's announcement:
At the time of the Master Trust refinancing (end of 2017), the collateral value of the Master Trust assets was $2.596B, using the contractual rent number above, that's about a 6.8% cap rate, seems reasonable in today's environment, add in the restricted cash inside the securitization and the mortgage loans but leaving out the vacant properties nets us $690MM in equity value within the Master Trust. Let's exclude the Academy distribution center, workout/vacant assets, and the ShopKo term loan, but obviously include the cash, gets us to $792MM of asset value, subtracting out the termination payment to SRC and preferred to SRC gets an NAV of $13.70 per share. This number is highly sensitive to the cap rate used to value the Master Trust, at a 7.5% cap rate the NAV under the same methodology would drop below $9 per share.
Who will buy SMTA? I think there's a wide range of buyers for the Master Trust (typical equity buyers in structured products: insurance companies, hedge funds, etc.), but there is a new public REIT that's run by former SRC executives and pursues a similar ABS funding strategy, Essential Properties Realty Trust (EPRT) that would make sense as a buyer.
I increased my position a bit first thing this morning, but still keeping it fairly small due to the leverage, plus SRC will be a beneficiary of any strategic transaction as it will further simplify SRC making clearly apparent its undervaluation compared to peers like O and NNN.
Disclosure: I own shares of SMTA, SRC
Who will buy SMTA? I think there's a wide range of buyers for the Master Trust (typical equity buyers in structured products: insurance companies, hedge funds, etc.), but there is a new public REIT that's run by former SRC executives and pursues a similar ABS funding strategy, Essential Properties Realty Trust (EPRT) that would make sense as a buyer.
I increased my position a bit first thing this morning, but still keeping it fairly small due to the leverage, plus SRC will be a beneficiary of any strategic transaction as it will further simplify SRC making clearly apparent its undervaluation compared to peers like O and NNN.
Disclosure: I own shares of SMTA, SRC
MDC, I thought that STMA has a CMBS asset. I did not see that in your analysis.
ReplyDeleteThat's the Academy Sports distribution center, their term loan trades for about 70 cents on the dollar, so that one might also be turned over to the lender. It would need to sell for an 11% cap rate to cover the CMBS debt, it might, but guessing there isn't enough residual value there to move the needle much.
DeleteGiven secondary trading for Academy's debt, curious that SMTA's NAREIT investor deck (June 2018) plugged in $144M for the CMBS asset, which would imply like 6.5% cap rate on that. Does management have a history of not being conservative on NAV estimates or was this a case of avoiding "talking down their book?"
DeleteThat was the collateral value assigned when the CMBS was put in place, it was an independent valuation agreed to by the lender, Spirit, rating agencies etc. Unlike the ShopKo non-recourse mortgage, SRC was the beneficiary of the timing on that cash out refinancing, but it appears well timed as well because Academy Sports is circling the drain. That was an intentional move by SRC, wasn't as bad of a credit as ShopKo at the time of the spin, but another effort to rid SRC of a problem tenant. I don't think you can draw parallels to the MTA directly, but I'm bias.
Deleteare there any other assets
ReplyDeleteThe company slide lays out the remaining assets: the equity in the MTA, workout assets, unrestricted cash and the Shopko term loan. The unencumbered (non-Shopko) workout assets might be worth $20MM, so that's another $0.50/share, the Shopko term loan is pari passu to the ABL (secured by crap inventory) which is maybe worth $0.25/share too if we're lucky.
DeleteI am struggling with this one- you are basically betting on 50bps of cap rate on the trust (7.5% vs. 8%) to be up 25% or down 20%. Do you have any insight into recent market transactions for this type of trust asset? Thanks
ReplyDeleteI agree, there's a big swing based on that assumption, I don't have a specific transaction on the securitization, but based on implied cap rates triple net lease REITs trade anywhere from ~7.4% at VER (high end) to ~5.0% at O (low end). I'm guessing the MTA will be toward that high end of 7.0-7.5%, when it was refinanced at the end of 2017, it was valued at a 6.88% cap to derive the 75% LTV debt capacity.
DeleteMDC--Do you know anything about management alignment with SMTA. Thanks.
ReplyDeleteSMTA is externally managed by SRC, SRC receives $20MM annually plus expenses and a total return promote (using $10.01 as a base, adjusted down for the $1.58 received in dividends), their termination fee is 1.75x the annual fee plus expenses or $47.3MM. SRC wants to wrap up SMTA quickly, they'll get their termination fee plus the $155MM in preferred they own back, utilize that cash to invest in more net lease properties that will actually grow revenue. Analysts are rightly or wrongly not giving SRC full credit for the AFFO they're receiving from SMTA, none of the other net lease REITs have a similar satellite entity, in order to push their valuation up they want to resolve SMTA.
DeleteWhat do you mean by "promote"?
ReplyDeleteIn addition to the base management fee, there's a "promoted interest fee" that acts as an incentive compensation, above a 10% IRR SRC gets 10%, above 12.5% SRC gets 15%, and above 15% SRC gets 20%. $10.01 is the base, its an IRR calculation so it won't be exact, but back of the envelope SRC needs to get $9.42 to get any incentive fee (since they already paid out $1.58 in dividends since the spin) if this was sold around the first anniversary of the spin.
DeleteFor what it is worth, here were Jackson's comment re: Master Trust on today's SRC earnings call:
ReplyDeleteAnswer – Shivani A. Sood: I appreciate that as in general, both for you and sort of commenting on SMTA, but [as it is] about the marketing of the master trust there, can you give us some color on how demand has been sort of versus your expectation?
Answer – Jackson Hsieh: Look, we sort of categorically said we wouldn't talk about that, but I would say that we are aggressively in conjunction with working with the trustees to move as fast as we can to get this resolved in terms of the completions. I would characterize the interest to be better than I expected. I'll just leave it at that.
I caught that too, given where REITs trade and how open securitization markets are I don't see why there would be decent demand out there for the MTA.
DeleteDid you mean to say "I don't see why there wouldn't be..."?
ReplyDeleteWhoops - yes, good catch, *wouldn't, as in I expect there to be demand for the master trust, good environment to be a seller.
DeleteIn terms of a potential monetization, have you thought of the scenario where an all-stock merger is done and those pro forma shares are appraised at the same discount which SMTA presumably currently trades at? In other words, the shares might not actually move up to the purported reference stock consideration value (per the merger agreement), yet SRC would nevertheless receive their promoted interest fee based on such stock consideration value.
ReplyDeleteThank you
I hadn't, kind of sounds like what a dirty BDC would do (or Michael Dell), but I guess SMTA isn't that dis-similar? Could happen, SMTA is trading at a big enough discount that maybe the market has already sniffed that out? I don't see a ton of near term risk at this price, fed is out of the picture for now, REITs are on a nice run, the MTA portfolio is relatively clean, seasoned ABS platform/investor base should be worth something too.
DeleteYeah the value considerations you mentioned appear very logical to me, including the caveat re: sensitivity to cap rates.
DeleteNow I may be missing a key point from the incentive agreement, but other than insider ownership, there doesn't appear to be any mitigating factor preventing SMTA/SRC management from striking a DVMT/Dell type deal (or really any merger were acquirer share price post announcement hardly squares up with the reference price used for announcement). And SRC's promoted interest wouldn't be affected since the Total Shareholder Return reference in a stock merger would be based on pre-announcement acquiror stock value. (see below excerpt).
"Share Value, as of any given date, means the VWAP per common share for the 10 consecutive trading days on the principal exchange on which such shares are then traded immediately preceding such date; provided, however, that if a Change in Control causes the end of the Measurement Period, Share Value will mean the price per common share paid by the acquiror in the Change in Control transaction or, to the extent that the consideration in the Change in Control transaction is paid in stock of the acquiror or its affiliates, the Share Value will mean the value of the consideration paid per common share based on the VWAP per share of such acquiror stock for the 10 consecutive trading days on the principal exchange on which such shares are then traded immediately preceding the date on which a Change in Control occurs"
Hmm, I think it would only be an issue if a private REIT bought SMTA? So the "Share Value" in that case would be some made up private valuation to keep the Dell analogy going. A private REIT might do that as a way to come public? It's happened a few times (thinking ZFC which I posted here a couple years back). But if say, CLNC bought SMTA, we could be swapping stock in two shares both trading at a discount to NAV, but the promoted interest wouldn't be calculated off of CLNC's (in this example) NAV but instead its discounted share price, so wouldn't SRC be incentivized to make that exchange ratio as high as possible to SMTA?
DeleteBut good catch, I hadn't seen that clause, fun thought exercise as we wait for something to happen.
Yeah, I imagine SRC would be incentivized to get max exchange ratio in that case, although....Mr. Market. SMTA post-announcement could still trade lower than the merger consideration implied by acquiror's 10-day VWAP pre-announcement.
DeleteIMO it's not a coincidence that SRC's promote isn't subject to post-announcement market risk. For instance, the promote could have been structured based on 10-day VWAP up to merger close date, with final exchange ratio adjusted accordingly. That would theoretically -- assuming a cash merger just isn't forthcoming -- incentivize SRC to extract as much value as possible from selling net leases (then special dividending from MTA release account) than from stock consideration. Then again, why risk a lengthy sale process when cap rates seem near-term generous?
Btw, the above "Share Value" clause suggests that a CoC acquiror using stock consideration would have to be publicly traded, since "...the Share Value will mean the value of the consideration paid per common share based on the VWAP per share of such acquiror stock for the 10 consecutive trading days on the principal exchange on which such shares are then traded immediately preceding the date on which a Change in Control occurs." Perhaps that takes care of the Dell/DVMT avenue of getting screwed.
Following on your comment regarding Essential as a potential buyer..
ReplyDeleteNote Essential's ~$200 million secondary equity raise
https://ca.finance.yahoo.com/news/essential-properties-realty-trust-inc-201100525.html
Initially thought this might be them building a war chest for a cash acquisition, but use of proceeds suggest otherwise: (1) $95.4M probable acquisitions and tenant contruction reimbursement so far in Q1 2019 and (2) repay of $83M revolver. Which would leave them with $20M of firepower not including the PF $300M undrawn revolver.
Thus, assuming they are an interested buyer of SMTA, they'll likely be funding a substantial portion using stock. Note also that their recent acquisitions have been purportedly done at a cash cap rate of ~7.3%, vs the 6.8% collateral cap rate at which SMTA issued debt in late 2017.
Essential's ABS funding vehicle seems to allow for higher leverage ($515.1M ABS debt against $609.2M in "net investment amount" of pledged properties as of Q4 2018, so is that 85% LTV?) at lower weighted average interest rates (between 4.17% and 4.51%), so a merger would make less sense than direct cherry-picking of properties within the MTA, unless their own ABS vehicle has limits on total collateral levels.
One last thing. Essential currently trades for a PF P/FFO of ~16.2x (their February 2019 guidance is roughly consistent with PF for recently announced equity raise & incremental FFO from use of proceeds). Assuming the MTA was a stock on its own, 2019 "MTA FFO," free from the onerous SRC management fee, would be ~$80M (rents less interest charge). From Essential's perspective, even if management increased its compensation by say $10M to reflect its expanded "empire" post acquisition or to reflect hiring a Rodriguez-led team to manage MTA properties (or as Buffett would say "paying themselves more for merely breathing), they could still technically pay up to $1.1B before diluting shareholders.
Now, of course, since Essential's strategy has been to buy properties with low to mid-teens weighted average lease terms (higher than MTA's) and leases with unit level financials (does MTA disclose theirs?), the market would probably discount P/FFO pro forma for merger. Lets say a draconian 50% haircut down to 8x P/FFO is palatable, and Essential could still pay up to $560M for MTA equity. Which would work out to an implied 7.2% cash cap rate, still within Essential's historical acquisition cash cap rates.
Great comment - I saw the equity raise and had a similar thought but didn't go through the math like you did here. If it's another public company, EPRT makes the most sense followed by the hybrid CRE/net lease credit REITs. I hope we hear next week during the taped call that Shopko won't drag out, keys are sent back and SMTA's hands are clean.
Deletehttp://investors.essentialproperties.com/file/Index?KeyFile=397568374
DeleteEPRT expanding their credit facility, certainly gearing up to do something. I didn't realize EPRT is also tied to Todd Boehly, certainly familiar with debt and securitized vehicles, not afraid to buy things with hair on them.
Thank you for the update.
DeleteLooks like they're contemplating another $150M equity raise ("Parent REIT follow-on offering") in addition to this credit expansion (conditions precedent on page 83 of amended CA). No filing as to that though and an offering could be in many forms.
Not sure EPRT paying cash (using this credit expansion) for a potential merger and adding the MTA debt wouldn't trip a few covenants even after a $150 "equity raise." To be within covenant, they'd have to issue some more equity. The expanded credit facility can then be used to pay down some of the upcoming MTA maturities. All speculations of course, but that's a sizeable debt raise.
Goes back to the question of what the value of SMTA's ownership in PF mergeco would be as intended (i.e. at merger announcement) vs post merger announcement (after markets digest what new EPRT would look like with additional leverage and perhaps lower quality asset mix from the MTA). That TSA hurdle would be based on the former
TSR*
Deletehttps://www.sec.gov/Archives/edgar/data/1722992/000172299219000010/smta4q18pressrelease.htm
ReplyDeleteShopko stores are gone now, lender foreclosed on them.
Anyone got a recent trade price for the Academy debt? thx
ReplyDeleteBid/ask is about 72-74
DeleteIs this a good or bad outcome?
ReplyDeleteI view it as good, but I haven't had a chance to go through the full press release yet, but if the foreclosure was clean and undisputed (meaning the CMBS lender isn't accusing SMTA of any kind of fraud), then this should make the rest of the company pretty easy to sell. A few random assets, cash and the MTA equity.
DeleteThere was no mention of any long tail to the Shopko sale (not that this means there isn't one). Of course the pro forma CAD figure is pathetic (and is peculiarly just above breakeven almost as if the annual fees & dividends to SRC were set such that SMTA shareholders alone bear the risk of post-spin fed rate hikes...which would be roughly in line with the DNA of an i-banking lifer like Hsieh).
DeleteThe levered SMTA equity IMO remains attractive insofar as SRC doesn't prioritize repayment of the prefs when marketing the SMTA (i.e. repaying the prefs using proceeds from the highest quality MTA assets as opposed to from the median). But I don't know how possible objectivity is when Hsieh is also chairman of SMTA...
I don't think SMTA shareholders alone bear the fed rate hikes, more that SRC designed it to be SMTA shareholders bearing the risk of Shopko, all other cash flows get swept to SRC via the management agreement and preferred shares.
DeleteAlso - I don't think SRC can sell assets inside of the MTA to pay off the preferred shares, any sold assets would typically either be reinvested within the securitization or used to pay down the trust's notes, don't think the Indentures allow them to raid the piggy bank unless I'm mistaken.
Right, that was my take too -- implicitly, if SMTA shareholders are bearing the risk of a Shopko bankruptcy, and Hsieh set the management fee at the high end of 1%-5% of NAV, SMTA shareholders thus must depend on the MTA's liquidation cap rate for eventually value and not operating cashflows. By sweeping all ex-Shopko cashflows, Hsieh has implicitly placed the SMTA shareholder at the mercy of interest rates.
DeleteI doubt he cares about either SRC or SMTA's share price, since his massive annual pay -- the supreme benchmark that many lifer i-bankers especially measure their worth on -- is tied to his salary+bonus (more stock, not stock options, is issued the lower SRC price is and vice versa). And so he cares more about keeping the job than anything else. To do so, he would have known that he needs to be able to make the argument to passive shareholders and/or the SRC board that he squeezed every last penny from SMTA (particularly if the fed had continued lifting rates), proving his loyalty so to speak. What I don't think he anticipated was that two activist investors would amass a 14% stake in SMTA...
Anyway, my jaundiced view notwithstanding, I still agree that the levered MTA equity has satisfactory odds, although the up/down here might make a 1990s Wells Fargo Greenblatt synthetic payout configuration more applicable.
I felt the same way about this outcome but Rodriguez did not sound enthusiastic on the webcast. I thought the press release also did not provide the level of optimism I was expecting.
ReplyDeleteI didn't get that vibe, a bit dry just because he's clearly reading from a script. But if you look at the valuation of any net lease REIT (other than SMTA or SRC), its gone straight up since the beginning of the year now that the Fed is pausing here, I think that's only a positive for SMTA's "private" value.
DeleteYes, I think lower bond yields are bullish for the private value of SMTA as well. I'm still surprised at SRCs continued undervaluation.
ReplyDeleteAlso waiting for SRC to pop back up and SMTA to be sold. Seems the market doesn't yet believe SRC is healthier post spin-off. They still need a rating upgrade and an improved portfolio via reinvestmemt. Unsure how much interest SMTA has garnered so far but I believe the structure of Master Trust has value. Unfortunately, investors were not given much.
ReplyDeleteI think SMTA is worth the estimated NAV of the master trust. In the mean time they continue pump out large dividends.
DeleteSMTA is getting pummelled in the markets. I guess the only way to realize the NAV at this point is to sell Master Trust.
ReplyDeleteYep - that's the communicated plan at least.
DeleteMy concern is that the prospective buyers will try to lowball based upon the share price. Personally I would be disappointed with anything less than $11 a share.
ReplyDeleteThat's fair, they could just sell the master trust equity and put the SMTA shell in liquidation after that. I think the market is pricing in fears of SRC abusing SMTA shareholders since they're not really incentivized beyond getting in their termination fee and preferred shares. And then the leverage, tiny changes in cap rate assumptions swing the equity considerably, although with rates where they are that movement should be in our direction.
DeleteWell at least there'll be an academic benefit to how this plays out regardless of disappointment level: another data point to test the validity of the much trumpeted financing/cap-rate edge that publicly traded REITs have (buy high, "market-price" low).
DeleteFWIW EPRT completed YTD acquisitions (March 9) at a 7.4% cap rate and that was prior to the Fed's dovish communique, so that's a positive sign.
Btw since the MTA is a lot of assets for one single buyer to swallow, anyone thought through why Hsieh can't/won't simply stagger MTA sale process to favor the prefs and termination fee first (other than 14% activist presence). Pg. 25 of the below pref agreement describes a liquidation trigger in the event of a substantially-all sale MTA assets (note: Maryland law requires shareholder vote for such sale). That would also trigger the termination fee.
Like how the MTA works wrt cash withdrawals? i.e. if they cherry-pick and sell the "highest quality" 51% of MTA rents for say a 6.8% cap rate and use proceeds to prepay sufficient debt to get down to 75% LTV again, would the remaining cash still be restricted or could that theoretically be used to call the prefs?
https://www.sec.gov/Archives/edgar/data/1722992/000119312518184545/d431172dex31.htm
I don't 100% follow, but the MTA isn't 1 securitization, its five, so I don't see how they could really do this cherry picking you describe assuming each deal is of relatively the same quality. They describe and talk about it as one securitization, and they'll likely sell it that way, but I don't think they can manipulate it in the way you describe, but I could be wrong?
DeleteUnless the MTA mechanism prevents early partial debt prepay or has a cash sweep stipulation, not sure why Hsieh can't or won't prioritize partial MTA property sales in service of liquidating and thus shielding the prefs from rising interest rate risk.
DeleteHere, SMTA's filings even spell out this risk in the "Risks Related to Our Relationship with Our Manager" section:
"Our Manager owns Series A preferred shares, which may give it different incentives from our common shareholders in a change of control transaction. Upon the occurrence of a Change of Control (as defined), we must offer to purchase the Series A preferred shares held by our Manager at the liquidation preference, plus any accrued and unpaid dividends to, but not including, the payment date. As such, our Manager might be incentivized to facilitate a Change of Control even if such Change of Control might not otherwise prove beneficial to our common shareholders. At the same time, the offer to purchase feature of the Series A preferred shares held by our Manager may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a Change of Control if we do not have sufficient cash to complete such offer to purchase, under circumstances that otherwise could provide our common shareholders with the opportunity to realize a premium over the then-current market price or that our common shareholders may otherwise believe is in their best interests."
disclosure: I'm long the SMTA equity thesis. I'm merely mulling downside scenarios which while remote, are in my view necessary when one hands their funds over to a manager whose management DNA was forged at an investment bank.
Sorry - Still confused. If he does a partial MTA property sale, those funds be used to pay down the notes within the securitization or reinvested in other net lease assets, how does that impact the preferred stock? I don't see how they could raid the MTA for the benefit of the preferred stock which is at the holding company level. If the prefs were in danger, why pay out the $0.33 dividend here to the common? I fully appreciate the skepticism with regards to an external manager here and I view that risk language saying that SRC might not search out the best deal for the common but essentially accept anything that at least covers the prefs.
DeleteMy earlier question related to the very matter of how property sale funds can be used but maybe I should re-state: do you know if there's a stipulation which stops SMTA from withdrawing partial sales proceeds (once a sufficient amount of MTA debt is paid down to satisfy the MTA's LTV requirement) out of the MTA? Thanks.
DeleteThe prefs don't have to be in danger for Hsieh's primary incentive (keeping SRC job) to be relevant for SMTA equity value, especially if there's no stipulation to stop him from acting as incented (aside from activist presence).
I don't have access to Spirit Master Funding's deal documents, but I would just say generally that a cash-out refi type transaction isn't the norm.
DeleteOne more run through the NAV components:
ReplyDeleteMaster Trust:
Rent of $178MM at a 7% cap rate = $2.538B
Debt of $1.941B = $597MM
+ Vacant Properties, Mortgage Loans, Cash inside the Master Trust = $665MM
Other Assets:
Academy Distribution Center: $0 (11% cap rate is the breakeven, let's just assume $0)
Workout Assets: $6.4MM of rent at 10% cap rate = $64MM
Vacant Properties: $15MM * 50% haircut = $7.5MM
Unrestricted Cash (some of this is leaving in the dividend, ex dividend date is Friday)= $105.80MM
Preferred Shares: -$155.10MM
Preferred Dividends: -$15MM (lets assume a year)
Ongoing management fee: -$20MM (again, assuming a year)
Termination Fee: $-48.10
SMTA NAV = $14
But again, at an 8% cap rate (what STOR's average purchase price was in 2018), drops to the current stock price, so who knows. ERPT invested at a 7.6% cap rate over 2018 (guessing cap rates are lower today), at a 7.6% cap rate on the MTA rent would equate to $9.40 NAV.
Rodriguez bought 35000 shares on the open market averaging above $10 a share so he must believe that it is worth more than that.
DeleteI also found the transcript from the SRC conference call in February to be mildly encouraging:
"Throughout 2019, we will focus on three critical initiatives to position Spirit for long-term success. The first is to assist the SMTA independent trustees in their accelerated strategic process. Finalizing this process and decoupling Spirit from SMTA is the most critical step in making Spirit simple and understandable for investors.
We are already under way with the marketing of the Master Trust and resolution of the other assets within SMTA. "
"Shivani Sood -- Deutsche Bank -- Analyst
Hi, good morning. I appreciate that first being general, refrains from commenting on SMTA, but Jackson you spoke about the marketing the Master Trust there. Can you give us some color on how demand has been sort of versus your expectation?
Jackson Hsieh -- President and Chief Executive Officer
Look we sort of categorically said, we wouldn't talk about that, but I would tell you that we're aggressively in conjunction working with the trustees to move as fast as we can to get this resolved in terms of the completions. I would characterize the interest to be better than I expected, I'll just leave it at that."
For what it's worth: STOR AFFO yield on the date Ricardo bought SMTA stock (6/3/18): 6.3%. STOR AFFO yield today: 5.2%
DeleteAre you saying that STOR is a more attractive investment? I own more STOR BTW.
DeleteI was just commenting that STOR was buying similar assets as what's in the MTA at 8% cap rates in 2018, guessing cap rates are lower today, but how much lower? I think Dave A was making that same observation using AFFO, yields are lower today meaning net lease valuations are higher.
DeleteMDC, thanks. Yes, that is what i was driving at. I am having a hard time seeing how the MTA cap rate approaches 8% today. But, hopefully we find out soon from a buyer.
DeleteI guess SRC is also undervalued compared to STOR. The debt obligations may reduce the multiple on SMTA.
DeleteI agree that with an AFFO ot $2 per share they should be able to get a reasonable multiple. Even subtracting the shopko revenue there should be more value than current share price. Not a STOR multiple but higher than current price.
DeleteWrt Rodriguez' open-market purchase. My view is the price he paid for it isn't material. Even if he ends up losing some money on the investment, he gains two things: (1) resume experience as a "successful" sell-side banker turned public company CEO and (2) at minimum, a job at SRC with his former Morgan Stanley boss, Jackson Hsieh. He loses nothing really since he was also paid restricted stock (free of charge!) 3x the amount of his open-market purchase.
DeleteSo I personally don't expect much extra effort on leadership's part in extracting more value than they could "placer-mine" for.
You are right but from what I can see there is still incentive for them to sell at the highest price possible. Rodriguez has 126000 shares. At $6.5 he makes 800k on the sale. At $13 he makes $1.6 million on the sale. I think that is at least some motivation
DeleteYeah agreed and money is money right? Maybe it's just not the most encouraging sign of stewardship that they're using OPM to get upside without risk (and that risk was also paid by OPM)
DeleteSRC Earnings call - Jackson comments: "helping SMTA trustees FINALIZE their strategic process.." my emphasis. Here's hoping for some profitable "finalizing" of MTA disposition soon.
ReplyDeleteHe also closed with "we're very very close" to finishing the path forward plan.
Deleteyup - i posted before he finished. he has certainly done what he said he would to thus far.
DeleteIn Q1 earnings recording Ricardo directs us to a Shopko asset liquidation budget -- Case 19-80064-TLS Doc: 1018 filed 4/10/19. While fully dependent on asset sale proceeds realized, it shows Shopko Term B-1 getting paid off - albeit in last place and requiring some "litigation related proceeds". Still fully reserved per Ricardo.
ReplyDeleteThat would be a nice win, about $0.75/share in value. I did some light Googling on the Academy Sports distribution center, couldn't find a listing, don't know if you had any luck? Their term loan still trades at a big discount at around 75.
DeleteI didnt find a listing either.
DeleteProbably means its worth more than the CMBS loan attached to it, otherwise they'd just mail back the keys like the Shopko portfolio, it appears to be in a good location outside of Houston, Amazon has a big distribution center near by, it should have some value?
DeleteI also glanced through the EPRT call, they mentioned cap rates coming down recently, mildly positive for SMTA.
I've been a buyer recently.
it would be nice to squeeze a little value out of the Academy property. I have been tempted to add as well.
DeleteFWIW Mangrove Partners increased their position by 20% to 3.5M shares (~8% of common) while Indaba Capital increased their position by 17% to 3.4M (~8% of common as well); both have cost bases of ~$8.25 and $8.40 (my estimate), respectively (unadjusted for the latest declared special dividend).
DeleteThanks - both firms I respect.
DeleteI found an interesting tidbit in SITC's Q1 call -- Credit Suisse must have been the CMBS lender on the Shopko portfolio, they hired SITC to manage the portfolio, but it was short lived, must have already been sold. So the risk of the lender coming back to SMTA seems low at this point.
Incredible spot & insight. SMTA had collateralized 85 shopko assets (83 owned properties + 2 seller-financed notes), so that conclusion certainly seems plausible.
DeleteI was also looking for the Katy DC listing but couldn't find it either. I did see that Academy's GA DC is for sale. Same size facility at 1.5mm sq ft, and is offered at $43/sq ft. I get outside Houston is better location than outside Macon, GA, but I don't see much value in SMTA's Academy DC. I've got the CMBS at $83m, so they'd have to sell it for >$55/sq ft to get anything out of it. I've had it marked at $45/sq ft in my NAV, i.e. underwater, and I'm going to stick with that after seeing GA listing.
DeleteProbably a smart conservative assumption, but the Jeffersonville DC has $3.7MM in NOI versus $9.3MM for the Katy TX DC. Also keep in mind, that their corporate headquarters is located at the Katy TX campus, likely a more critical DC for the company than the GA one. I think we're all trying to be conservative in the valuation to account for SRC screwing the SMTA minority shareholders, and its all in how you underwrite that and where you make the conservative adjustments to NAV.
Deletehttps://www.wsj.com/articles/shopko-resolves-disputes-with-sun-capital-and-creditors-11558549656
Delete$15MM in litigation proceeds from Sun Capital versus the $17MM in the 4/10 filing.
welp, better than $0. lets hope the other dispositions are proceeding as planned.
Deletehttps://cases.primeclerk.com/shopko/Home-DownloadPDF?id1=MTEyNDgwOA==&id2=0
DeleteNew Shopko presentation showing the Term Loan being essentially paid in full (I think?).
Separately, anyone know where the promote stands? Just simple math, in the 10-K they put the initial 30-day weight average price at $10.01, with the upcoming dividend, we'll have received $2.20 in dividends, my math puts the 10% hurdle in play around $8.73 today? And the 15% hurdle at $9.20 today? If right, should give SRC incentive to get full value.
Here is a little more detail on the components of recovery for the Term Loan claims. "Low" can be discounted further while still providing near 100% recovery (Doc: 1427).
Deletehttps://www.dropbox.com/s/14rxugu1s0ocipd/Clean%20Shopko%20Liquidation%20Analysis%20Doc%201427%205-23-19.pdf?dl=0
*without the upcoming dividend, it'll be $2.53 in dividends with the July dividend.
DeleteThanks - missed that analysis, great news.
DeleteThanks for those Shopko Chp. 11 updates.
DeleteWrt the promote, I'm coming in at a ~$8.80 watermark for the 10% hurdle (initial $10.01 "outflow" date = May 15, 2018, which may differ from others').
Some interesting price action in SMTA recently.
ReplyDeletehttps://www.reuters.com/article/us-spirit-mta-reit-m-a-hospitality-ma-ex/exclusive-hospitality-properties-nears-2-4-billion-acquisition-of-spirit-mta-assets-sources-idUSKCN1T400B
ReplyDeleteSounds like just for the MTA, would equate to about a 7.5% cap rate, let's hope its accurate!
From the press release:
ReplyDeletePurchase Price (Incl. Make-Whole Payment) (1) $ 2,417
Implied Cap Rate (Incl. Make-Whole Payment) 7.1%
I get to around $8.50-$9.00/shr pro-forma assuming no Academy equity and workout assets worth $1/shr
ReplyDeletehttp://investors.spiritmastertrust.com/file/Index?KeyFile=398169006
I get higher.
DeleteMTA = $450MM
Academy CMBS = $29MM (8.5% cap rate, industrial assets go for much cheaper - see the recent Blackstone deal over the weekend, yes, Academy is distressed, but this DC also serves as their headquarters
Workout Assets = $74MM (some of these have already been re-leased)
Cash = $108MM
Shopko B-1 Loan = $33MM
Total to SRC = -$203MM
=~$11.40
Timing might be a risk here, since HPT is not buying the HoldCo, there will be some expenses and time to wind it down, maybe we get 90% of the value end of Q3 and then there is a tail to the rest.
DeleteOnly a risk if one is long under-water (i.e. lower than one's estimate of MTA + other NAV) calls, no? Otherwise, time is technically our friend, given the incredible IRR associated with current purchase prices assuming $11.40 is feasible for example.
DeleteCould you elaborate? I do have a slug of the $7.17 Oct calls.
DeleteThe $9.67 calls for instance, timing could place them at risk of maturing worthless if those other non-MTA assets aren't liquidated prior to expiration (i.e. assuming the market continues being weird and needing time to see assets liquidated before assigning them proper value).
DeleteTiming seems a bit tight on those, optimistically we see a $10 special in Q3? But could leak past the Oct expiration, but interesting idea.
DeleteTheir strikes will be reduced by some specials over the next few months, but yeah my point was the timing risk pertains more to those under-water calls than SMTA stock itself or ITM calls.
DeleteBtw, I guess HPT didn't really pay much value for the MTA structure itself? Makes me wonder how hard Hsieh pushed negotiations to get full value for the MTA asset....
They're collapsing the structure right? So apparently they don't value it at all. Yeah, maybe that's why he gave up the promote, going to be some costs to wrap up the HoldCo and get this done without a fight from Indaba/Mangrove?
DeleteYeah especially given that the proceeds were sufficient to pay off prefs held by SRC, the opinion of whose shareholders he cares most about (due to their power, through the board, to fire him and arrest the massive annual paycheck he receives merely for breathing; I don't mean to be unkind, I just have long experience in sell-side banking and know the archetype well).
Deletep.s. At current SMTA prices, Indaba & Co haven't really made any money on the stock, but it has served one bit purpose: insulating their portfolios somewhat from broader market volatility. That said, both institutions have relatively large commitments in SMTA, so I doubt they expected to merely break even on the trade. We'll see if they comment.
I'll take $11.40 a share.
ReplyDeleteI'm buying more today, in the low $8s, basically no value being assinged to anything but the MTA and cash.
DeleteSo you are assigning $3-$3.50 per share for the remainder of the assets?
DeleteSomething like that, the Shopko loan is $0.75 of that. Academy DC could be anywhere from $0 (unlikely in my view) to $1.40, I think it's worth 8.5% cap minimum which would be $0.67/share, then the remaining workout assets - what are those worth? They re-leased a couple of the dark properties and contributed them to the MTA for cash according to the Q1 call, what cap rate do you put on $6.5MM? 10%?
Delete450+cash-term fees-dvds payable-pfd = 7.60/shr; so trading in low 8s assumes equity for academy and/or some value for workout assets; what am I missing?
ReplyDelete$450 MTA + $108 cash -$14MM for april dividend -$203MM to SRC = $7.91, so not quite $0
Deletedvds payable is 28 for april and july…$7.60; so value above 7.60 comes from academy equity and workout assets
ReplyDeleteBut the July dividend hasn't gone ex yet, ex-date is 6/28
Deleteahh ty; also im missing value of shopko term loan; any confidence in any value for that?
ReplyDeleteEarlier in the thread there are few links to liquidation plan, recovery seems like a near certainty.
DeleteLink to MTA purchaser's deck re: the transaction from earlier today: https://s2.q4cdn.com/208827006/files/doc_presentations/2019/06/HPT-Acquires-Net-Lease-Portfolio-for-2.4B-presentation_vFINAL.pdf
ReplyDeleteIs the bid ask for Academy debt still low 70s?
ReplyDeleteYeah - 75ish, I just created a new post, have a screen shot of the term loan on there.
Delete