In Seritage Growth Properties' (NYSE:SRG) 2017 annual report, CEO Benjamin Schall wrote that the real estate investment trust was likely to form joint ventures to redevelop many of its premier assets. Joint ventures can help Seritage tap into other companies' expertise for major projects. They are also an efficient way for the Sears Holdings spinoff to fund the redevelopment of its properties, due to buoyant demand among investors for private real estate.
It didn't take long for Seritage to get started. In March, it sold a 50% stake in The Mark 302 -- its downtown Santa Monica project -- to a unit of Invesco (NYSE:IVZ). Since then, Seritage has accelerated its efforts to form joint venture partnerships for some of its best assets, including two deals announced just this week.
Asset-rich but cash-poor
Seritage Growth Properties owns about 39 million square feet of retail real estate. Many of its properties are in great locations and have the potential to generate very high rents after being redeveloped.
However, Seritage produces virtually no cash flow today, because about 20% of its square footage is vacant and most of the remainder is still occupied by Sears and Kmart stores that pay very little rent. Furthermore, as of the end of March, the company had nearly $1.3 billion of debt, compared to only $135 million of unrestricted cash and $177 million of restricted cash.
Meanwhile, Seritage disclosed in its Q1 earnings report that it has nearly $900 million of spending planned for the next two years or so to finish its already-announced redevelopment projects.
Seritage's restricted cash includes $154 million reserved for redevelopment work. The $135 million of unrestricted cash is also available for this purpose. Nevertheless, Seritage Growth Properties clearly needs additional capital to complete its redevelopment activity. That's why it has been seeking joint venture agreements so eagerly.
Two new deals announced this week
On Tuesday, Seritage announced a second joint venture with Invesco Real Estate. Seritage sold a 50% interest in The Collection at UTC for $44 million to a separately controlled account that Invesco manages. The transaction values this project at $165 million upon completion. This implies that Seritage and Invesco will invest another $77 million to complete the redevelopment of this valuable site in San Diego, which entails replacing a Sears store with 226,200 square feet of highly desirable retail space.
Seritage also announced a second joint venture on Tuesday. First Washington Realty paid about $23 million for a 50% stake in The Corbin Collection, a redevelopment project in West Hartford, Connecticut, that is nearing completion. This deal values The Corbin Collection at $52 million, including the relatively small amount of redevelopment costs not yet incurred.
Seritage received proceeds of about $67 million from these two joint venture deals. It used most of that total to pay down mortgage debt associated with those properties. Additionally, Seritage and First Washington Realty took out a $20 million loan against The Corbin Collection. Seritage's share of $10 million can presumably help fund other redevelopment projects.
Importantly, these joint venture deals have reduced Seritage's future redevelopment obligations, since the joint venture partners will pick up half of the tab going forward. Between the two Invesco joint ventures and the new First Washington Realty deal, approximately $64 million of redevelopment costs will be transferred to joint venture partners.
There's more to come
Investors should expect Seritage to strike more joint venture agreements for its best properties in the next year or two. This is probably the single most cost-effective tool the company has for raising capital right now.
In fact, Seritage appears to have already reached a joint venture deal with Tucker Development to convert the last two Sears stores in the city of Chicago into mixed-use developments. These redevelopment projects and the partnership with Tucker Development haven't been formally announced, though.
Seritage is also likely to pursue a joint venture for its Esplanade at Aventura project, arguably its most desirable retail property. Planned mixed-use developments in Hicksville, New York, and Redmond, Washington, are also likely candidates for future joint ventures. These deals will help Seritage raise the capital it needs to transform its real estate portfolio and replace struggling Sears and Kmart stores with a diversified mix of tenants paying dramatically higher rents.