Shares of real estate investment trust (REIT) Seritage Growth Properties (NYSE:SRG) rose as much as 24% in the first hour of trading on Aug. 10. That's a welcome relief for investors, since the stock is off by around two-thirds so far in 2020, including the big daily jump. That's a painful decline, but it makes sense when you look at the bigger picture. So does the day's outsized gain, when you consider the industry news that came out today.
First the background. Seritage was spun off from Sears Holdings about five years ago. Sears Holdings basically owned a portfolio filled with troubled Sears and Kmart stores. From day one, the goal was to shift away from these dying retail concepts by redeveloping and repurposing the properties it owned so it could find new tenants. Things were going as well as could be expected until Sears went bankrupt. And then the COVID-19 pandemic completely upended the retail landscape. Investors jumped ship, expecting, not unreasonably, that Seritage's ability to find new tenants was no longer as feasible as Wall Street once believed.
Today, The Wall Street Journal reported that "people familiar with the matter" say mall owner Simon Property Group is in talks with Amazon to convert anchor tenant space into warehouse space for the online retail giant. That will give Amazon a greater presence in metro areas and speed up its delivery of goods. But if Simon can do that, so can Seritage, which also owns fairly well-located, and vacant, big box stores. Thus, investors likely took the news about Simon and Amazon as a positive for Seritage. Indeed, perhaps the REIT's business model isn't dead just yet.
Seritage is not a good option for risk-averse investors. It eliminated its dividend in 2019 after Sears went belly-up and has no plans to pay a dividend in 2020 (unless it has to for tax reasons), showing just how bad things are for the REIT today. In fact, the company reported earnings late last week and the reading was pretty bad, with funds from operations (FFO) falling to a loss of $0.49 per share from a loss of $0.11 per share in the second quarter of 2019. This is probably best viewed as a turnaround stock at this point. Perhaps the Simon/Amazon news is good, but it will take more than rumors to get Seritage back on track. All in, there's definitely turnaround potential here, but you'll need a strong stomach to stick around.