Experiential Real Estate And Live Entertainment Will Drive Long Term Value Potential

Catalysts

About Seaport Entertainment Group

Seaport Entertainment Group develops and operates experiential real estate, hospitality and live entertainment destinations anchored by the Seaport in Lower Manhattan and the Las Vegas ballpark.

What are the underlying business or industry changes driving this perspective?

• Accelerating residential and younger demographic growth in Lower Manhattan and adjacent Brooklyn neighborhoods is expected to support gains in foot traffic and neighborhood spend, which may drive higher hospitality revenue and more resilient landlord rental income over time.
• Ongoing densification of the Seaport district through curated food and beverage, experiential retail and concepts such as Meow Wolf, Flanker Kitchen and Lawn Club positions the portfolio to capture rising demand for differentiated social experiences, which may support same-store sales growth and improve consolidated revenue.
• Completion of technology integration across point-of-sale and procurement systems, along with internalizing Tin Building operations, creates operating leverage and tighter cost control, which may support higher segment adjusted EBITDA margins and narrower non-GAAP net losses.
• The sale of 250 Water Street and disciplined capital allocation into projects that target higher returns, including landlord work for new tenants and seasonal activations like Enchant, are expected to reduce interest expense and cash burn while focusing earnings power on a more productive asset base.
• Continued strength in live events and marquee programming at Pier 17 and the Las Vegas ballpark, including high profile concerts, festivals and sports, may expand sponsorship opportunities and premium upsell experiences, which could boost both top line entertainment revenue and overall margin mix.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Seaport Entertainment Group's revenue will grow by 12.4% annually over the next 3 years.
• Analysts are not forecasting that Seaport Entertainment Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Seaport Entertainment Group's profit margin will increase from -102.4% to the average US Real Estate industry of 4.9% in 3 years.
• If Seaport Entertainment Group's profit margin were to converge on the industry average, you could expect earnings to reach $8.3 million (and earnings per share of $0.64) by about December 2028, up from $-120.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 61.7x on those 2028 earnings, up from -2.3x today. This future PE is greater than the current PE for the US Real Estate industry at 30.2x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Ongoing softness in international tourism to New York City, which remains below pre pandemic levels and is expected to stay weak in the near term, could structurally limit higher spending visitor traffic to the Seaport and constrain hospitality and entertainment revenue growth.
• Persistent underperformance and structural challenges at certain legacy venues and the Tin Building, where management has not yet committed to a breakeven timeline, could result in a prolonged drag on segment profitability, depressing consolidated net margins and delaying the move to positive operating income.
• Execution risk around leasing and activating roughly 100,000 square feet of remaining space, including the large Nike space that does not return until 2027, means that if tenant openings are delayed or rents fall short of expectations, landlord rental revenue and future earnings could materially underperform projections.
• Heavy capital commitments of around $50 million to projects such as Meow Wolf landlord work, venue build outs and bringing seasonal activations like Enchant in-house may not generate sufficient incremental demand or pricing power, which would pressure free cash flow and limit improvement in net earnings despite a currently strong balance sheet.
• Despite year-over-year improvement in adjusted metrics, the company still generated a net loss attributable to common stockholders of $33.2 million in the quarter, and if cost reductions, operating model optimization and G&A rationalization fall short of targets, sustained losses could weigh on investor sentiment and constrain earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $30.0 for Seaport Entertainment Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $167.6 million, earnings will come to $8.3 million, and it would be trading on a PE ratio of 61.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $21.38, the analyst price target of $30.0 is 28.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.