Seaport Entertainment (SEG) - Thoughts and Waffling
There have been several posts about the recent Seaport Entertainment (SEG) spinoff from Howard Hughes (HHH). Most state it's an obvious long due to the substantial discount the stock trades at relative to BV/Construction costs. As a long-time Five Point Holdings (FPH), these discounts to NAV stories are often not the best ways to analyze a cash-burning business. While I agree there appears to be significantly more value in the underlying assets, I’d expect NAV to decline over the next several years stemming from cash burn at the Tin Building, declining attendance at the LV Aviators ballpark stemming from the Oakland A’s move to Las Vegas, and skepticism surrounding the value of the air rights above the Fashion show mall in Las Vegas.
They are finalizing a rights offering, allowing existing shareholders the right to buy 1.25 SEG shares for $25/share for every 1 share of SEG owned. With a backstop from Bill Ackman of Pershing Square, they’ll raise $175m, providing a runway for management to turn the business around. Post the rights offering, the market cap will be ~$365m. They have ~$100m of debt and preferred equity pre-offering and will have a net cash balance sheet of ~$68m post-rights offer. Market Cap $365m, EV ~$300m.
Las Vegas Assets
Las Vegas Aviators
LV Ballpark
80% Stake in the Air Rights Above the Fashion Show Mall
NYC – Seaport Assets
Management must find ways to turn the business into a cash flow positive, specifically at the Tin Building. The Tin Building is a 54,000-square-foot culinary establishment located on the original Fulton Fish Market site. The property opened in September 2022 after undergoing an over $200 million, five-year renovation to reconstruct the building in collaboration with Jean-Georges and is leased to their joint venture. The building has three levels, offering over 20 culinary experiences, including restaurants, bars, grocery markets, retail and private dining. I visited the restaurant in 2024 and can attest the place is beautiful, border lines overwhelming. I asked the bartender and managers how business was doing (at the oyster bar), and they stated that Thursday-Sunday is always packed with tables turning over 2-3 times. Monday-Wednesday is less crowded, with tables turning just ~1. The outdoor patio is closed during the winter, though it is a great space during the summer. Unsurprisingly, business is slower in the winter when the propensity to travel in freezing temperatures is far less. ~2 years in, the building is still losing significant amounts quarterly.
The good news is the building improved by ~$500k from Q1 23 to Q2 24 and ~$3.5m from Q2 23 to Q2 24. Management has additional levers to pull that will likely improve results further, including less management, kitchen consolidation, and overall more efficient operations, which come after operating the building for a few years. Currently, each restaurant has its own kitchen and manager. They should be able to lower the management headcount, possibly to 1-2 (maybe 1 per floor). I’d also be curious how the produce/market is performing. Historically, restaurants + markets are not the most successful business models. One does not go to a restaurant to buy food. Conversely, one is unlikely to pick up groceries after eating. The management agreement states SEG pays Creative Culinary Management $125k/year and $150k/month, or $1.65m/year. With the disastrous results thus far, this could and should be renegotiated to better align the management company with the overall performance of the building. The final thing that seriously needs to be on the table in 2025-2026 is to close/sell the building should operations not substantially improve. The worst thing they can do is continue to throw good money after a bad asset. NAV will continue declining should they operate this asset at a perpetual loss. Menu price increases are unlikely to be a source of additional revenue as prices are at market rate.
Other risks I see include: 1. When the Oakland A’s move to Las Vegas, demand for Aviators tickets will decline as fans are more likely to go to an MLB game than a AAA game. 2. Air Rights have significant value on paper and are often rarely transacted with the primary comp of MSGS and the air rights above Maddison Square Garden. That said, it does sound like management is discussing a hotel/casino with Brookfield and likely other partners. The timing of this is tricky to know.
Pier 17 is a mixed-use property with office and retail space below the top-floor event space. Only 47% of the space is occupied by Nike and ESPN. ESPN airs their Get Up show here. However, rumors of them leaving in 2025 have circulated. ESPN occupies ~17,000 SF at an estimated $75/sf or $1.5m/year. Pier 17 opened in 2018 and has attracted 2 tenants in that time, with one rumored to be leaving. Certainly, Covid played a factor in the lease-up, but given the property has been around for several years, one has to wonder why companies have not leased this space. Should ESPN leave, occupancy declines to ~25%, and the $1.5m rent loss falls directly to the bottom line.
In 2023, Pier 17 rooftop hosted a Winterland skating event. The event generated $1.4m in revenue. However, the event cost $3.2m to put on. Assuming they do not put on this event again, it would result in a $1.8m savings. Some believe Pier 17 could put on events during the winter. This is incredibly unlikely, even if the space was fully enclosed. They’d likely put a tent up, spreading heaters throughout the space. I don’t think there's a way they could fully keep out the cold, and being up several stories would have wind gusts that make this type of event relatively unrealistic. On the other side, I’d expect them to sell the naming rights of the rooftop to generate advertising revenue.
Below is my estimated stabilized fair value of all the properties. My best estimate for current asking rents and transaction comps is $60/SF and a 7% cap rate for office properties. Stabilized, these properties alone equate to an EV greater than the pro form EV, and that’s before giving the Las Vegas Assets and 250 Water Street any value. The Fashion Show Mall Air Rights and 250 Water Street are potentially two of the company's most valuable assets, which speaks to why this could be an interesting setup.
250 Water Street is a fully permitted 1-acre development site zoned for 547,000 SF of housing, office, retail, and community space. The cost of developing a project like this is far higher than SEG's capacity. They will likely contribute the land to a JV, transferring construction risk and costs while retaining an equity interest in the property. 250 Water St is currently carried at $96m on SEG’s B/S.
Regarding the air rights. I have no idea what they are worth, and I would say they are a call option for a future casino/hotel build.
Below is my estimated P&L for the Aviators and LV Ballpark
While near-term profitability is strong, once the Oakland A’s move to Las Vegas, I expect attendance and, therefore, profitability to decline. This is an all-fixed-cost operating model where slightly lower attendance dramatically affects the P&L. In addition to the baseball games, the Ballpark holds special events. These could include concerts, food fairs, and other festivals. These are very profitable events.
Taken all together. In my opinion, the decision to buy/not buy is not as clear-cut. Yes, Howard Hughes spent a considerable amount on developing these properties. On the other hand, the investments seem to be poor. With a management team solely focused on leasing the properties and running a tighter ship on the Tin Building, it’s not unrealistic to think the company could turn FCF positive sometime in 2026. Conversely, these assets may not be worth the money spent. Howard Hughes management likely ignored these non-core assets, and things will be different with focused management. Stop the Tin Building bleeding, lease vacant space, and find a partner for 250 Water Street. In 5 years, my bet is NAV is lower than today. These “valuable assets” but declining NAV stories are often nothing more than dead money (until they're not). Directionally, I’d expect profitability at Pier 17 rooftop, LV Aviators/Ballpark to decline while office properties increase profitability from lease-ups.
The risk/reward is attractive, with my valuation being 63% higher than today's trading price. I worry about a few things in the valuation: 1. The duration of lease-up properties – am I conservative/aggressive? I used a 4% discount rate because several properties are fully leased. 2. I assign little value to the air rights, primarily because the timing of the use or sale is unknown. 3. The tin building lost $37m in 2022 and $42.7m in 2023, and I estimate I will lose ~$32m in 2024. My valuation of -$30m could be aggressive if they cannot figure out how to make this property profitable, which again brings me to my concern that NAV is more likely to decline in the next few years.
I understand that I go back and forth on the idea. After following/owning Five Point Holdings (and Howard Hughes, for that matter), where the story is in the same ballpark, I worry over the next five years, you’ll see a similar story play out. The stock will trade below FV/NAV while that FV/NAV continues declining. Until there are some operational improvements at the Tin Building and the path to the FCF profitability is more apparent, I’ll likely be on the sidelines, barring a significant price decline (mid to low $ 20s).
You calculate the occupied sqft of the Pier 17 as 47% x 147,514 sqft (not including the rooftop). But then to calculate the final occupancy of 25% if ESPN leaves you are doing ((69,332-17,000)/212,514). I guess there is a mistake there. It should be ((69,332-17,000)/147,514) = 35%.
ESPN represents 25% of current occupancy.
Also I have some doubts regarding the ESPN issue and the Pier 17. The company discloses that the tenant could be leaving by the end of 2025 and this represents 12% of total rental revenue 2023. (this would represent USD 2.6 M). Taking your USD 1.5 M pro year and rental revenue 2023 of USD 22 M I get ca. 7%.
What I am not seeing?
Thanks in advance