Seritage Growth Properties (NYSE: SRG) has been a bust for long-term investors since launching as a real estate spinoff from Sears Holdings seven years ago. After an initial burst of investor enthusiasm, Seritage stock crashed from a 2016 high above $50 to barely more than $5 at the end of June.
However, shareholders have finally gotten some relief in July. Seritage stock has doubled to more than $10 this month, after the company said it intends to wind down operations, sell its remaining assets, and return the net proceeds to shareholders. Even after that quick gain, Seritage Growth Properties is likely to keep moving higher as the liquidation process plays out.
Asset sales accelerate
When it separated from Sears Holdings in 2015, Seritage owned stakes in 266 properties. In the following years, it opportunistically sold some of its real estate to fund the costs of redeveloping other assets. That whittled down its portfolio to 212 properties by early 2020.
Unfortunately, the COVID-19 pandemic severely disrupted Seritage’s redevelopment strategy. Leasing activity slowed to a crawl, and many prospective tenants canceled plans to take space at the company’s properties. Under new CEO Andrea Olshan, Seritage responded with a new plan to streamline its portfolio to between 120 and 130 locations.
Over the past year, Seritage has ramped up asset sale activity and expanded its asset sale plans. But in spite of this progress toward its long-term strategic goals, Seritage stock kept sinking. That eventually compelled management and the company’s board to take more aggressive action to close the yawning gap between its market value and the value of its underlying assets.
Moving toward liquidation
In early May, Seritage revealed that it had already sold $75 million of assets in the opening weeks of the second quarter. It also had $85 million of real estate under contract and additional properties worth hundreds of millions of dollars available for sale. And in June, the company put the bulk of its multitenant retail portfolio on the market: 38 locations that could be worth up to $900 million.
In its boldest move yet, Seritage filed a preliminary proxy statement on July 7 asking shareholders to vote for a “plan of sale” to liquidate the company. If shareholders approve the proposal, Seritage anticipates that it could sell all of its assets and shut down within 18 to 30 months.
Seritage’s board estimates that after selling all of its properties and repaying all of its debt and other known obligations, it will make total distributions to shareholders between $18.50 and $29 per share. Considering that the real estate company’s shares had been trading between $5 and $6 since mid-June, it’s no wonder that the stock rocketed higher after this announcement.
Plenty of upside left
Based on its Thursday closing price of $10.41, Seritage stock still trades for less than half the midpoint of the company’s estimated distribution range. While shareholders aren’t likely to see any payouts until 2023 or 2024, this looks like an irrationally large discount.
Investors appear to be very skeptical that Seritage’s $18.50 to $29 estimated distribution range is realistic. However, the company owns quite a few prime development sites. In late 2021, Seritage sold a property near San Francisco for a stunning $128 million. And just in the last month, it sold a vacant former Sears at Westminster Mall in Southern California for $46.3 million.
There are still perhaps 10 comparably valuable properties remaining in Seritage’s portfolio, in addition to the 38 retail properties that Seritage is marketing and dozens of other less prominent assets. As a result, the $18.50-$29 per share estimated distribution range seems likely to prove accurate.
One of the biggest remaining risks to shareholders is ongoing litigation on behalf of the Sears Holdings bankruptcy estate claiming that Seritage underpaid for its real estate. However, I expect Seritage to settle the litigation at a reasonable cost, impacting shareholder distributions by perhaps $1 per share.
With shares still trading at a roughly 50% discount to the cumulative payouts shareholders will likely receive over the next few years, Seritage stock still looks like a bargain.
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