Long idea: SRG- Liquidating a troubled CRE asset

A failed empire born from the ashes of another failure is selling everything and the kitchen sink

After conducting a strategic alternative review in March of 2022, Seritage Growth Properties (symbol: SRG) filed proxy materials with the SEC on July 7th giving an initial outline to shareholders on how and why the business would self-liquidate over the next 18-30 months. In mid-August, Seritage filed revised proxy materials with deeper insights into the review process. In them, Seritage and its third-party appraisers concluded that a liquidation, net of all fees and frictional costs, would distribute between $18.50 and $29 per share to common shareholders. I believe this estimate to be a fair assessment of SRG’s portfolio value:

Prior to this proxy filling, I lamented the lack of opportunity in SRG’s shares: a conservative estimate based on SRG’s “at least $1.2B of non-core real estate portfolio” showed a value of around~ $15-16 per share:

Variance Swap @varianceswap

To no surprise mkt has it roughly right assuming they can monetize $1.2B of real estate in 1 year without paying taxes on it.. looked way more interesting at $6/sh

After speaking with commercial real estate brokers and previous SRG counterparties, as well as CBRE, I think the $18.50-$29 is a fair estimate of value.

Background:

Seritage has only been public for 7 years as an entity formed as a sale-leaseback to its original Sears Holdings Inc. owners. Formed from a rights offering to original Sears Holdings owners, Seritage was created with $2.7B of fresh capital, roughly half equity and half funded through their CMBS.

A few years later, Seritage would refinance these outstanding CMBS with a secured term loan from Berkshire Hathaway, carrying a 7% coupon. Seritage’s strategy was twofold: become a legitimate blue-chip REIT with a tight cost of capital and an attractive dividend, while attempting to reposition their commercial real estate portfolio away from their largest tenant: Sears Holdings.

Unfortunately for Seritage, COVID came along and ruined both of these plans: Seritage has been forced to liquidate $820M of real estate assets through 2020 and 2021 just to stay afloat and keep their development projects humming, after $1.2B. Their stock price, once at a high of $57, hit a low of $5 per share in June of 2022. Berkshire Hathaway’s term loan maturity was 12 months out, with conditions to a refinancing nowhere close to being achieved. With both goals completely failed and bankruptcy on the horizon, CEO Ben Schall leaves the company and Andrea Olshan is appointed CEO.

Current state of affairs:

In March of ‘22, a strategic alternatives review was conducted to review a potential large-scale asset sale and de-REIT the company. Twenty parties had demonstrated interest in purchasing the entire company outright (although none filed an indication of interest), while 90 parties had potential interest select SRG assets. Because of the breadth of geographic locations in the SRG portfolio, it was determined that the optimal course of action was to liquidate select assets piecemeal rather than look for a buyer for the whole company. Asset valuation methodology was summarized below (my highlighting):

The missing pieces of the Seritage puzzle (their non-core, non-cash flowing assets) was marked-to-market during a period of turmoil in real estate markets (early June ‘22) by third parties. Even with hitting the low bids, Seritage still estimates $18.50-29 per share.

Valuing the cash flowing assets, with my shorthand napkin math and Barclays’ more in-depth premier/multi-tenant retail valuation, shows a substantial margin of safety for a stock trading at $13. More details are available in the proxy around gross proceeds versus what shareholders will net, but I believe the valuations work. Anecdotally, the two major impediments to SRG’s asset sales were Eddie Lampert’s unreasonable offers, and the pending litigation from the Sears Holdings bankrupt estate. With both of these issues resolved, assets will start to clear at market prices.