One Last Puff - Seritage Growth Properties (NYSE: SRG)
Seritage Growth Properties (NYSE:SRG) is a publicly traded REIT containing the prime industrial/commercial use properties formerly owned by Sears. Unable to turn the properties into more productive assets, Seritage management is working to unwind its portfolio and pay down its remaining debt to Berkshire Hathaway and other small liabilities. While the company currently trades around $3.30/share, I believe the liquidation value is around $5/share.
Prior to the bankruptcy of Sears, Eddie Lampert (chief executive of ESL Investments), created Seritage Growth Properties as a REIT to perform a sale-leaseback with Sears in order to raise capital for the declining retailer. Through an equity rights offering of $1.6bn and raising $2.7bn of debt, Seritage began with 235 fully owned properties and 31 joint-venture investments (42.4mn sqft) that were promptly leased back to Sears. Now, Seritage holds just 14 properties.
In 2018, Berkshire lent the REIT $2bn to undergo its transformation. Seritage sold off properties, used short-term leases, and Sears leases to pay down Berkshire. From the latest financial release, Seritage has $240mn outstanding with Berkshire. Additionally, because they needed to quickly pay down Berkshire, redevelopment plans ran into trouble, causing some write downs. With a changing retail atmosphere from consumers preferring in-person shopping to e-commerce, Seritage struggled to deliver its turnaround. Therefore, in October 2022, shareholders approved a “Plan for Sale” and liquidation of the company.
Since its peak during Covid at $23.22/share, SRG stock is down 84%. Aside from management’s failure to recycle prime Sears real estate, a recent significant factor was a revaluation of assets after internal weaknesses in management’s valuations were revealed, which immediately lowered the value of Seritage’s real estate. This scandal with management led to widespread distrust and an exodus from shares. Additionally, optimism for a turn around and a failure to successfully execute this led to investors becoming disinterested in owning shares for the long run.
In the latest quarter, Seritage showed what sales took place and future sales projections. After adding the value of these sales and future sales, applying a tax rate assumption of 25%, and then subtracting Seritage’s remaining debt to Berkshire ($240mn), preferred stock ($71.3mn), and accounts payable ($36.23mn), shareholder’s equity comes out to $279mn versus a current market capitalization of $184mn. Per share, this equates to $4.97 of value. With SRG at $3.30/share, if management can successfully liquidate at conservatively projected values, shareholders have about 52% of upside.
If Seritage is unable to liquidate at stated values, a potential downside scenario is 35% to its underlying asset prices. This scenario puts a value on Seritage’s equity of about $49mn. At $3.30/share, buyers have 73% of downside, an unattractive upside/downside balance. Included in my model is a range of probabilities of a positive payout to equity holders. Under current assumptions, including a share price of $3.30, a 60% probability of a positive payout is required for a positive expected value of investment. In a more attractive scenario, with a hypothetical share price of $2.50, only a 40% probability of success is required for a positive expected investment value. However, this expected value only leads to $0.01/share. Therefore, for an opportunistic investor, I would recommend avoiding Seritage unless they are currently trading at $2.50/share or lower.
While the current negative sentiment could be justified to distrust Seritage, I believe that with the revaluation being completed and with management’s sole purpose now to liquidate the company (as mandated by shareholders with their “Plan for Sale”), there will be a successful payout. This has been proven with recent announcements of asset sales and immediate repayments of Berkshire’s term loan. My only hesitation is that the risk/reward at the current share price mandates patience for a better buying opportunity. With assets in some of the most prime real estate geographies in the country, such as their property in central Boca Raton, Florida, and Aventura Mall in Miami, I am confident in SRG’s upside.
Updated on 3/26/25