Shares of retail landlord Seritage Growth Properties (SRG 4.25%) rallied out of the gate on Jan. 26, gaining as much as 12% in the first few minutes of trading. However, that advance proved short lived, with the stock quickly cooling off. By 1 p.m. EST the shares were up just 4% or so. The initial spike was the result of a business update. The retreat from the peak was likely the realization among investors that there's still a lot of work to be done before this REIT can truly live up to the word "growth" included in its name.
Seritage Growth Properties is the real estate investment trust (REIT) created by Sears Holdings a few years back, when that retailer was looking to raise some much-needed cash. At the start of its life, Seritage was saddled with a portfolio filled with troubled Sears and Kmart stores. The goal then, and now, was to transition away from those retailers, upgrading assets and finding new and better-positioned tenants. It is, and always has been, a turnaround story. Management has made progress, since it has basically no material exposure to Sears or Kmart anymore. But this was always going to be a long, difficult, and costly effort. And then things got extra complicated when the coronavirus pandemic showed up.
After eliminating the dividend and receiving funding from Berkshire Hathaway, Seritage is now attempting to raise cash by more aggressively selling non-core assets. All sales, meanwhile, have to be approved by Berkshire Hathaway. Seritage needs all the cash it can get, given that 64% of its portfolio has been signed as leased, with the rest designated as signed not occupied (SNO). The SNO category is basically properties that still need to be renovated for new tenants. The work is nowhere near done in this turnaround effort.
The big positive from the update that was released today is that Seritage collected 91% of the rent it was owed in December. That's up from around 50% in May, so that is good news. But it still has a lot of SNO leases that it has to work through, as noted above. And there's no way to really speed that process up. To make things worse, following third-quarter 2020 earnings, the company transitioned to a new CFO and is currently looking for a new CEO, with the previous one exiting the scene on Jan. 22. Two top-level departures in such a short period of time usually isn't a good thing. So, all in, the update wasn't bad, but it wasn't great, either.
Seritage is still a work in progress. It is hardly surprising that investors were initially cheered by today's news, only to digest it a bit more and decide that maybe the news wasn't quite as positive as originally thought. Seritage is not a good choice for risk-averse investors. Those looking for a turnaround stock might find it of interest, but you need to make sure you really understand what's going on before you jump aboard.