Real estate secrets at Syms?…
The motto of discount clothing retailer Syms Corp (SYMS) is: “An educated consumer is our best customer.”
An educated shareholder, on the other hand, can be a pain in the butt.
Esopus Creek, an activist hedge fund holding about 4% of Syms stock (the Syms family controls the majority), has been educating itself about the firm’s property holdings by digging into municipal records. (Esopus, which filed this 13D in April, already won a battle against Syms, forcing it to re-list its stock after the company decided to slink away and trade on the “pink sheets” late last year.)
This week Esopus shot off a letter, quaintly quoting Robert Louis Stevenson (”the cruelest lies are often told in silence”) and bashing Syms for understating its real estate assets by “a whopping 33%” in its SEC filings. Though this got the press’s attention (even making the New York Post), it might boil down to a wonky dispute over SEC disclosure requirements. Among yesterday’s batch of 8-Ks was this letter to Esopus from CEO Marcy Syms, who fired back her own Robert Louis Stevenson quote (you go, girl) and claimed that most of the “missing” real estate can be found right in the firm’s last 10-K. From a quick glance this looks to be true, but the 10-K uses approximations and scatters real estate information among various sections of the filing.
Ms. Syms did allow that the 10-K omitted about 400,000 square feet of space, mostly leased out to third parties. But she said the income from those leases was immaterial, adding:
Surely you must understand that not every bit of information you manage to unearth having “donned your miner’s hat” ought to be included in a public company’s SEC reports; indeed, to do so would overwhelm the users of the reports with an avalanche of minutiae, causing them to miss the forest for the trees.
Whether or not Syms got its disclosure right, companies watching this dust-up might decide to err on the side of greater transparency, at least for information that’s publicly available elsewhere. From management’s perspective, it’s probably better to have your investors miss the forest than to risk lawsuits over a few missing trees.
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June 14th, 2008 at 10:01 am
Thank you for your analysis. I would like to add that for a small company like SYMS, 400,000 sq ft is not an immaterial amount of real estate. Furthermore, the number omits the approximate 175,000-200,000 sq ft of buildable square feet (i.e. air rights ) the Company owns in lower Manhattan. No mention is ever made in their 10K about this real estate either.
The Company recently paid $200 per square foot for air rights next to its lower Manhattan property. This implies , using the Company’s own transaction as a metric, that the undisclosed 175,000-200,000 buildable sq ft is worth no less than 35-40 mm in value. ( In fact market prices in nearby locations imply far larger valuations).
Assuming arguendo that the $200 per sq ft valuation represents the state of the current market, how does 35-40 mm in value relative to a company with a market capitalization of 230mm become an immaterial amount of real estate not worthy of a disclosure?
Furthermore, other than the Company’s disclosure regarding their leasing of a property in Westchester to another retailer, the Company has only now disclosed that it leases out swaths of its undisclosed owned real estate to third party tenants. Try to locate an earlier disclosure, you might be hard pressed.
And using the net rental income to reduce SGA expenses for a company which is a self described “off price retailer” gives an inaccurate portrayal of the true operating margins for the retail operations. No footnotes have ever disclosed the offset.
I would disagree that this is merely a “wonky” dispute.
Sincerely,
Andrew L. Sole
Managing Member
Esopus Creek Advisors LLC
June 14th, 2008 at 11:34 am
Hi Andrew,
Thanks for your comment. What’s wonky is in the eye of the beholder, I suppose, but in any event this dispute has some unusual aspects and I’ll be following the story with interest. By mentioning the Syms argument that certain information was immaterial, I wasn’t intending to express any view as to which side has this right. The issue of what’s material to investors is, of course, far from simple and lawyers can make a nice income from arguing about it. Since what we do here is read SEC filings, I picked up the Marcy Syms quote because it neatly frames a big picture issue about disclosure. Best, Wendy
June 16th, 2008 at 3:17 pm
As far as I can tell, Esopus is alleging that Syms is making it seem like they’re worth less and making less than they actually are. Can anyone explain to me how Syms would benefit from that?
June 18th, 2008 at 9:11 am
Chris,
It appeards that, implicit in the Esopus assertions is that Syms was obscuring value so as to cheaply take the company private. One needs to look no further than the plunge in the stock price to single digits upon the de-listing announcement to understand how this is feasible. De-listing is like a kiss-of-death to public, non-control shareholders.
June 19th, 2008 at 12:56 pm
I would agree, but since the company has been forced to re-list, that doesn’t entirely explain it. I focused on the disclosure issues in my post, but the argument here is also about whether Syms must maximize the value of its real estate assets for the benefit of the public shareholders. The letter from Marcy Syms to Esopus takes this on, saying basically, hey guys, we’re retailers, not real estate developers.
June 23rd, 2008 at 9:32 am
WF,
Sure, since Syms is not a developer real estate should be viewed in the overall context of the companies operations. However, Syms lackluster earnings record as a retailer should certainly raise some serious questions about resource deployment.
June 24th, 2008 at 5:20 am
Is SYMS merely an off price retailer or a real estate developer, or is it both? Its 10K declares it as purely an “off price retailer”, yet its disclosure and the data from the recent 8K may suggest otherwise.
SYMS stated that its net rental income reduced SGA by approximately 2% for the most recent fiscal year or approximately 1.5mm dollars (notwithstanding the argument of whether it is even appropriate to account for the rental income by reducing your SGA expenses, especially since the Company considers itself an “off price retailer”).
SYMS reported approximately 2.2mm dollars in operating income for the most recent fiscal year, thus 2 of 3 dollars SYMS generated in operating income last year was attributable to rental income. And if you look at recent years, rental income (assuming the net rental income has been the same for the last few years) has been a significant portion of its total operating income.
Should not the numbers speak for themselves about how SYMS should characterizes its business?
Sincerely,
Andrew L. Sole
Managing Member
Esopus Creek Advisors LLC
August 3rd, 2008 at 6:38 pm
I concur with Mr. Sole.