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. On an adjusted Enterprise Value basis, it is priced at 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.