Seaport Entertainment (SEG) - Management Call Takeaways

SEG Management Call Takeaways - 10/16/24

On 10/16/24, I had a call with Matt Partridge, CFO of Seaport Entertainment Group (SEG).

In my Seaport Writeup from 8/30, my main concerns were: 1. Tin Buildings Cash Burn 2. Vacant office space, and ESPN leaving 3. Oakland A’s moving to Vegas and the effect on the Aviators attendance 4. Pier 17 lease efforts & event space utilization

Tin Building Cash Burn

The focal point of all calls thus far.

Agreed with my view that the building is confusing/overwhelming/not intuitive.

They are currently undergoing a budgeting and review process to determine where the bloat is. 12 dining concepts throughout the building all have their own manager and operate in a silo. Each restaurant makes food purchases and not as a collective group. A 15,000-square-foot commissary kitchen on the 3rd floor could aid in much of the cooking.

Once the budgeting process is complete, during the winter months, when business is slowest, expect them to renovate and make small capital investments to improve the layout and functionality and remove redundancies. I think the market space on the first floor should be removed, and the bar would make a lot more sense there. While it’s crazy to think the place needs more capital after $200m was just spent, it's clear the original design did not contemplate profitability, just a lavish building.

Howard Hughes Management VS Seaport Management

Fundamentally different views. Howard Hughes management is a land developer and not in the entertainment space.

There's plenty of office and residential space in NYC. Seaport management’s goal is to drive traffic, likely through experiences and shopping, by having people spend hours at the seaport rather than coming for dinner and leaving.

I think it’s safe to say these assets were an afterthought to the Howard Hughes team.

Cost Savings Potential (All Best Estimates)

12 restaurants, each with their general manager, could be changed to having one manager per floor (2 total). Assume $140,000 expense/manager. Going from 12 to 2 saves $1.4m/year.

Bulk purchases—This likely saves a few percent per year, which, on the largest or second largest expense, could be a few million dollars. I have no idea what the building does in revenue; a random guess is $100m. F&B typically has 70-80% GMs, putting food costs at the midpoint of $25m. If you can get a 5% bulk purchase discount, this equates to a $1.2m saving.

Commissary Kitchen – Food prep, side dishes, and other cooking expense savings. I don’t have a cost base to go off, but if you can move some of the cooking up to the commissary kitchen, you can potentially remove some of the chefs and potentially remove a kitchen or two, which could add additional seating. Cost savings: $500,000.

Pier 17 - I mentioned the winter wonderland, and he said it performed poorly. I stated I thought it lost $2m. He stated he didn’t know it was that high, so my $1.8m figure might be a touch high but nonetheless directionally correct. The event was a disaster.

Revenue Opportunities

Las Vegas Ballpark—There are opportunities to put on more events during non-baseball games. The ballpark did not host a Super Bowl or F1 watch party. More concerts and other events are all high-margin opportunities.

30/30/30/10 plan for vacant space – Want 30% of leased by known brands (Starbucks, Nike, other respected brands), 30% NYC specific (think of a Pizza spot – John’s of Bleeker, a NYC Steakhouse), 30% one of a kind destination (N of 1 – can only find in this location in the US), 10% pop up stores. Much of the vacant space has been attempted to be leased as office space; this is no longer the goal, as the company wants more than just happy hour customers. ESPN confirmed leaving. While it might have drawn some traffic, it was immaterial. In the near term, losing the cash flow hurts; however, if they can re-lease it to retailers, bars, or event/recreational businesses, it will end up a positive

Pier 17 - No current synergies exist between Tin Building and Pier 17. Offering a package that includes tickets to a concert and dinner at one of the restaurants makes sense. In my initial write-up, I was incredibly skeptical about the ability to have events at the rooftop during the winter. Management will put up two-story glass walls with a tent, allowing the space to be climate-controlled while maintaining the views. I am still not sold that people will go outside during the winter, even if they are going indoors. Matt confirmed the Tin Building is slower during the winter months due to weather; I am unsure why the rooftop would be different. TBD on the results.

Miscellaneous

Air rights: Getting anything done soon will be complicated due to several parties involved (retail tenants + Brookfield).

Oakland A’s – In my initial writeup, I thought the A’s moving to Vegas would be a net negative for the Aviators and ballpark attendance. Matt mentioned that the Twins and Astors have AAA teams near the MLB teams. I can't find studies or any info on it; the SEG team believes the proximity to the MLB will grow the AAA team as fans can now watch players go from the minors to the majors. I'm still unsure if I believe this, but the $100 MLB tickets and $25 AAA tickets may not appeal to the same audience. AAA is more family-friendly, while the MLB attracts higher earners and visitors.

250 Water St—1H 2025 story. They did not expect the lawsuit to end so quickly and to receive the 421a tax break. The property, at ~$90m on the books, significantly undervalues it. Seaport is not in the business of building, leasing, and maintaining a multifamily building (nor do they have the capital). They will look to bring in partners or enter into an agreement with a developer (ground lease). Expect something on this property in 2H 2025.

Conclusion

I can see how it will work as I write this. Cut costs, cancel money-losing events, lease space, and drive traffic. I think it’s obvious the HHH management team did not spend significant time contemplating the best options for the SEG properties. On the other hand, the cash burn at the Tin building is so high that I believe you need a combination of higher volume and lower costs. I also think 250 Water St could be worth the entire EV today. If management executes, shareholders will do very well in the stock. The downside is you own a money-losing business that languishes and underperforms, but hard to see how you lose significant money on the idea.

PS—If anyone has traffic data on the area that they'd be willing to share, I’d be curious what it’s been like. Management says it’s not that hard of an area to get to, but on the other hand, I heard no one goes to the area.