In a recent presentation, Seritage Growth Properties (NYSE: SRG) CEO Andrea Olshan said that the company wants to sell 40 to 50 of the properties in its portfolio. This is certainly a significant development, as Seritage's entire portfolio consists of 154 wholly-owned properties and 25 that are owned as joint ventures.
Should investors be worried about such an aggressive disposition of assets? Or is this a positive development for long-term investors? Here's a rundown of why Seritage is selling dozens of properties and what it means for investors.
Seritage plans to unload 40 to 50 of its properties
As the portfolio stands, Seritage has 25.9 million square feet of space in its portfolio. But that's somewhat misleading. After all, much of the portfolio consists of old Sears buildings that would either be torn down or dramatically reworked during redevelopment. The better metric is the 2,300 acres of land in Seritage's portfolio, much of which is located in top-notch shopping areas. Seritage's average Sears site is a 13-acre parcel when including both the land under the store and the surrounding parking lot space the company owns.
Seritage recently divided its portfolio into six distinct baskets, depending on the end use of the properties. For example, Seritage sees 10 to 15 opportunities for properties to be redeveloped into grocery-anchored shopping centers. Another 25 to 35 are in the "residential" basket and could ultimately be redeveloped into apartments or other residential uses. And one of the baskets is the "disposition pool," which now contains 40 to 50 properties.
Why is Seritage selling so much of its portfolio?
The short answer is that Seritage is selling these properties to raise capital. Seritage's core strategy is to redevelop old Sears properties into modern, mixed-use destinations that create shareholder value and bring in steady streams of rental income. But large-scale development costs money, and Seritage isn't profitable.
Specifically, Seritage gave its criteria for disposing of assets in a recent investor presentation. The company seeks to sell properties that:
- Would bring in more from a sale than they could be expected to generate from a redevelopment project.
- Are mispriced in the market in a favorable way for Seritage.
- Are located in smaller markets and wouldn't be "needle moving" value creators if redeveloped.
- Have significant execution risk, which essentially means that there are questions surrounding whether Seritage could develop a property as planned.
It's also worth noting that selling such a large volume of assets at once is somewhat uncharacteristic of Seritage. Sure, it's already raised about $1.2 billion through asset sales, but it's been more of a steady stream of dispositions that has gradually occurred since the retail real estate investment trust's (REIT's) 2015 inception. However, the real estate market is on fire right now, and Seritage could be in a position to realize excellent value for these properties.
Should investors be worried?
To be sure, Seritage's strategy hasn't exactly changed: Selling non-core assets to finance the redevelopment of high-potential properties has always been the strategy. This is just the company's most aggressive push so far and should leave it with 120 to 130 properties to focus on going forward.
I'll certainly be watching how the asset sales play out and how much value Seritage can get from the properties it just put on the market, but a war chest of cash to get aggressive with development could be exactly what Seritage needs to start forging a path to profitability.
One of the company's largest investors, Mohnish Pabrai, who owns about 13% of the stock, recently said, "In a couple of years, they'll be cash-flow positive."
While there is certainly a long way to go before that happens (Seritage lost $92 million over the last four quarters), it could translate into a lot of upside for investors if it does.