NYC Premium RE assets at a 80% Fire Sale
off its invested capital. Is it Deja Vu of $VNO in 2023?
Intro
Never bet against premium NYC RE assets; they can occasionally look depressing (e.g. 911, GFC, and Covid) but almost always bounce back stronger. That, besides research work, supported my investment case in Vornado Realty ($VNO) in 2023 when the market believed the NYC office was dead. It has been a 2x in 1 year, and I’m still long.
Today, I introduce a recent spin-off from a large RE Community developer, Howard Hughes ($HHH). Over the last decade, it spent over $1Bn capital acquiring and developing one-of-a-kind RE assets in a premium NYC area. It is priced, on an adjusted Enterprise Value basis, 80% off its invested capital.
That enters Seaport Entertainment Group SEG 0.00%↑.
Spinoff, rights, Cap table
SEG is a Howard Hughes ($HHH) spin-off announced in July. It includes a collection of RE assets, primarily in NYC and Las Vegas.
The spin-off comes with a $175Mn rights offering ($25/share, 7Mn shares) backstopped by Bill Ackman ( 37.5% owner). It was launched in September and closed1 (over-subscribed) on Oct 10.
It has 12.7Mn shares, 5.7Mn from the spin-off, and 7Mn from the rights. At $31/share (10/22/2024), its market cap is ~$390Mn. With its $175Mn rights offering raise and $85Mn net debts ($100Mn debts, $10Mn preferred, ~$25Mn cash), enterprise value is $300Mn.
Its $100Mn non-recourse debts are secured by 2 assets (250 Water and Ballpark); thus a $200Mn adjusted enterprise value, as debts can be deducted from asset value.
Thesis Highlights
This picture highlights SEG’s core assets: Pier 17, TIN, and Fulton Market. These three newly constructed, one-of-a-kind stunning assets are conservatively valued at $325Mn, a ~60% premium over SEG’s adjusted Enterprise Value (EV).
Furthermore, SEG’s other assets have an accumulated invested capital of $550Mn. Some could be company-maker at the right moment but bundled as optionalities. We will go over them later.
Assets Walk-through
I will discuss three core assets, glance over other assets, and highlight one.
Pier 17
A stunning waterfront 4-story building, 170k leasable space (130k office, 40k retail), and a 45k sqft rooftop concert venue with 3500 guest capacity.
The estimated building cost was $200Mn, but it cost $500Mn. Much of the overbudget was spent tearing out old pilings and rebuilding the pier foundation, a surprising discovery shortly after the original building was demolished in 2014.
Its office spaces have 2 tenants (Nike, 23k sqft since Y18, and ESPN, 20k sqft since Y17). Terms are not disclosed, but both pay $100+ /sqft based on a management comment on 2023 Investor Day. ESPN plans to move out in Y25.
The rooftop grew from running 30 concerts, with 84k tickets sold in 2021, to 63 concerts, with 204k tickets sold in 2023. I estimate the average ticket price to be $100 - $120, plus 20% F&B attachment. It averages $120-$140/pp. Thus, I estimated $25-28Mn annual revenue. Today, the rooftop is roughly breakeven.
Madison Square Garden trades at 3x EV/S, with ~ a 15% net margin. I value Pier 17's rooftop at $30Mn (1.2x sales).
For its 170k sqft leasable space, I model a 70% occupancy rate at a stabilized state, $100/sqft, which gets to ~12Mn NOI, valued at $120Mn using a 10% Cap Rate.
Thus, $150Mn for Pier 17.
A few catalysts for upside potentials: The team is looking into expanding concerts beyond the summer/fall season, and Pier 17's limiting factor that it mostly appeals to the creativity/entertainment business could be a tailwind as we approach the 2026 World Cup, where NY/NJ will host 8 matches, including the final.
TIN Building
TIN is a single three-story building with 55k sqft of leasable space, 12 dining venues, and a marketplace. SEG owns 100% of the building, which is operated by Jean-George JV. SEG owns 65% of the JV.
It recorded $9.5Mn in LTM lease revenue (~$170/sqft), yet its 65% ownership in the operating JV lost $36Mn and $39Mn in Y22 and Y23. The operating contract expires in late 2025.
In other words, TIN’s operating JV, with its 12 dining venues, lost $55Mn in 2023, an absurd amount given its small size. TIN’s absurd money-losing state is, in my opinion, a primary driver of SEG’s depressed valuation.
David O’Reilly, Howard Hughes CEO, 1Q24 cc:
Significant changes in the operating platform, which have been implemented by Jean-Georges in consultation with Anton and his team are yielding positive results and contributing to enhanced efficiencies and reduce costs. With more changes to come, we expect further improvements going forward.
There is a lot of low-hanging fruit, but barring a turnaround miracle, I expect SEG to move on once the contract expires. I model $7.5Mn stabilized NOI after the contract ends, and the 7.5% cap rate gets to a $100Mn valuation. I deducted $50Mn estimated cash burn between now and when it stabilizes, thus valuing TIN at $50Mn.
Fulton Market
Fulton Market is in a good state. It is a 115k sqft 3-story building, 100% leased (Lawn Club/20k, iPic/50k, Alexander Wang/45k sqft). Alexander Wang moved in 4Q23, paying ~4.4Mn/year (estimated based on $1.1Mn rental increase in 1Q24).
I find no disclosure on Lawn Club / iPic lease terms. I estimate ~$10Mn NOI for the entire building (model slightly lower lease rate for Lawn/iPic). I value Fulton Market at $125Mn (a moderate 8% cap rate).
Fulton market showcases how valuable a premium NYC RE asset could be worth.
A Quick Pause
3 core assets (Pier 17, TIN, and Fulton Market) add up to $325Mn, 60% higher than its current adjusted enterprise value ($200Mn).
If one thinks that discount is insufficient, SEG has other assets with a total invested capital of $550Mn, including 250 Water ($250Mn land + air rights + legal/admin fee), Seaport Uplands ($140Mn), Las Vegas Aviator Team, Ballpark Stadium ($130Mn build cost), 80% Fashion Show Mall air rights, 25% Jean-Georges Restaurant ($45Mn acq cost), and 21 apartment units at 85 South.
Optionalities are abundant, and the best part is that most assets incur no operating expenses to wait for the right moment. For example, Fashion Show Mall air rights could be worth $100Mn (1.8Mn sqft, land value ~$200/sqft, air rights are usually pegged at ~30-50% land value).
I won’t dive into each, but I will discuss 250 Water.
250 Water
Howard Hughes acquired 250 Water (a 1-acre lot in the Seaport district) for $180Mn in 2018. It spent ~$40Mn on air rights and ~$30Mn on legal/admin fees to have a fully approved court-battled plan to build a mixed-use building with 400 residential units (~20% for lower-income) and 220k sqft of commercial leasable space.
The building budget is ~$850Mn. Modeling $100/sqft for its commercial/retail space and $50k for each residential unit, it gets to ~$45Mn NOI, a mere ~5% return on the proposed $850Mn budget, excluding $250Mn prior-build costs.
SEG indicated intent to search for JV partner(s), and frankly, this is not currently an economically attractive project.
If you follow the project closely, you will agree that this is a rare and unique high-rise development asset in Seaport, and you won’t see anything like it any time soon. You can look to get a taste of the furious local opposition it faced.
I hesitate to assign a value given its poor economic viability; however, its rarity and uniqueness could attract less economically sensitive investors. Thus, the upside potential is real but hard to quantify. I highlight this one as a few analyses tag hundreds of millions of valuation to this asset, and my view is more conservative.
Why The Opportunity Exist
After a decade of over $1Bn invested capital, Seaport still burns cash each quarter. If Seaport had raised that capital from external sources, it would have been bankrupt. Investor sentiments are rightfully low.
Before the SEG spinoff, Howard Hughes's reporting disclosure of Seaport assets was very poor. Without alternative data sources, Investors have little insight into each building’s performance other than a general perception that Seaport loses money each quarter. Meanwhile, the under-the-hood truth is more nuanced and encouraging.
Trust in management is also rightfully low. The market brushed off Anton Nikodemus’s appointment as CEO in December 2023 despite his relevant entertainment/hospitality experience running CityCenter for MGM, which oversaw a list of mega MGM resorts in Vegas, and his shareholder alignment with large long-dated option grants and moderate salary.
An obvious bear case is that Seaport will continue to burn cash at a $50Mn annual run rate, weakening its position to capitalize on its valuable yet unprofitable assets until it depletes its cash reserve and faces assets forced sales (cents for a dollar).
While the management made poor decisions and faced multiple headwinds (e.g., Superstorm Sandy, COVID-19, and rising interest rates) during its Seaport development, it holds quality assets worth far more than its valuation. A competent team with aligned interests, as it currently has, has a decent chance at righting the ship and realizing its potential.
The best part is that, at its current depressed valuation, it doesn’t need to get everything right to earn a decent investment return.
Risks & What to Watch
It must stop bleeding cash at the TIN building. While it has ample cash (~$200Mn with rights offering), preserving them with a strong BS will allow time and the thesis to fully play out, especially for long-term optionalities such as Fashion show mall air rights.
Not to “Throw good money after bad” at 250 Water: As I discussed earlier, 250 Water's economic viability is weak. While the project has a storied past, and the company moved earth and heaven to get to where it is today, one must acknowledge the reality. In the meantime, the NY RE market has all sorts of buyers with different incentives, and premium assets always carry value.
It needs to improve transparency in reporting. If segment-level reporting reflects accountability, Seaport gets an F in accountability under HHH management. The only building that corresponds to a P&L line is TIN; all others are bundled together.
Pier 17 office leasing activity: With the upcoming 2026 World Cup and Metlife Stadium hosting 8 matches (including the Final) in the backdrop, Pier 17, a site for festivities, music, creativity, and entertainment, feels odd that its office space is only 30% occupied.
Management said interest never lacked, but a few deals broke at the last minute. Picking up leasing activity is required for the building to reach its valuation potential.
Credit
I first heard about this idea on X from RagingbullCap, and he offered valuable insights during our discussion. He also writes on Substack.
This VIC writeup, X post, and Reddit Forum provide valuable information to my research.