2. Seritage Growth Properties (NYSE:SRG)
Market Cap: $248.71 Million
Number of Hedge Funds: 22
Seritage Growth Properties (NYSE:SRG) is a real estate investment trust (REIT) that specializes in owning, developing, and managing various types of properties, primarily retail and mixed-use spaces, across the United States. Its portfolio includes interests in over 32 properties with approximately 4.1 million square feet of space available for lease. This includes both wholly-owned properties and those held in partnership with other entities.
The company has been focused on its plan of sale, a strategic initiative aimed at optimizing the company’s asset portfolio and enhancing shareholder value. Under this plan, management aims to gradually sell non-core and underperforming assets to generate cash proceeds. As of the second quarter of 2024, the company had accepted offers totaling over $150 million in gross proceeds from various property sales.
Seritage Growth Properties (NYSE:SRG) generated a total of $40.4 million from gross sales proceeding, which included $28.0 million from Multi-Tenant Retail assets, $3.8 million from Non-Core assets, and $8.3 million from two vacant/non-income producing Non-Core assets.
As of August, the company had five assets under contract, expected to yield $138.6 million in gross proceeds. It ended the quarter with $100.5 million cash and paid $50 million in debt repayment bringing its balance to $280 million.
Management plans to continue marketing additional assets based on market conditions, with anticipated sales occurring in 2024 and beyond.
O’keefe Stevens Advisory made the following comment about Seritage Growth Properties (NYSE:SRG) in its Q3 2022 investor letter:
“Seritage Growth Properties (NYSE:SRG) – A good idea on paper, hard to execute in practice. When we made our initial purchase in 2018, we thought the idea of repurposing existing Sears and Kmart properties at below-market rents into modern spaces, enabling the company to charge multiples of the prior rent, made sense. Increasing rents from $5 to $20 PSF with a 10-11% ROI seemed like a nobrainer. The return profile made sense, and applying moderate leverage to stabilized properties improved end economics. Multiple changes at the management level and a $1.44B loan from Berkshire with a 7% interest rate and covenants (yes, those still exist) made this an impossible endeavor. We thought partnering with Eddie Lampert would align our interests and prove an intelligent decision, given the capital and brain power he has put into this situation.
On paper, selling non-core assets and using the proceeds to fund Capex plans and ongoing corporate expenses makes sense. The problem is the number of properties the company needed to sell for this business model to work. Every year that went by materially lowered the company’s value as the interest expense proved to be a heavy burden. The company essentially turned into a death spiral where they were merely selling properties to meet the interest expense and having little remaining for the core part of the business plan. Compiling all this with the lockdowns in 2020 and 2021 and the supply chain mess still being worked through has further delayed this turnaround.
Today the company is much smaller. Seritage once owned 253 properties totaling 39m SF compared to today, where they own161 properties and 19m SF. During this time, they only paid down $100m of the term loan. The turnaround has taken too long, and the company has put itself up for sale. Again, on paper, this seems like a good idea; however, going through a sale of this proportion will take a long time in a calm environment. The rise in interest rates, tight credit markets, and equity market volatility make this a monumental task. I suspect the number of buyers for these properties, which was once small to begin with, is down to a handful. A critical issue with the SRG portfolio is that the assets are spread out across the country. One player is not going to purchase all these assets. Real Estate Developers and owners tend to concentrate their efforts on a single region (excluding the global players such as Blackstone, Simon, and other private equity groups). Seritage may be able to sell some nearby properties as a package but would likely take a discount to FV, or it has to sell each property one by one…(Click here to read the full text)
