Seritage Growth Properties (SRG 1.67%) isn't exactly a low-risk real estate stock. Only about one-third of its properties are generating income, and it plans to redevelop the rest over time. In simple terms, there's a lot that needs to go right for Seritage over the next several years if investors in it are going to profit. However, in this Fool Live video clip, recorded on Feb. 16, Millionacres real estate analyst Matt Frankel, CFP, and editor Deidre Woollard discuss why Seritage has tremendous potential to create value for its investors.
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Deidre Woollard: I think it's the most interesting right now because there was a point last year where I started to feel really insecure about where Seritage was going. I feel like I'm feeling a lot more confident now. They just announced a new CEO, Andrea Olshan, who previously ran her family's company, Olshan Realty, and has a lot of experience. Looks like they're signing some leases, they're collecting more revenue. It feels a little optimistic over there. Is that what you're feeling?
Matt Frankel: It's definitely more optimistic than it was in mid-2020. There's a few things that people need to know about Seritage. First of all, they are the most high-risk, high-reward stock on our list. They're speculative. They are a redevelopment company. If you're not familiar, they were created for the specific purpose of buying a bunch of Sears properties to gradually over time sell off the ones they didn't want, and renovate and modernize the ones that they do want, that have potential.
Not even Sears wanted to be a Sears landlord at that point. They had to get rid of their own properties. No one wants to be a Sears landlord. That's not the point. The point is that when Sears properties were built, they were generally the premier shopping locations at the time. In the '70s and '80s, when they were really building Sears out, that's where you went to shop. So a lot of them have great locations, like one I'm about to talk about in a minute.
Seritage has great property locations. They are like old dilapidated Sears buildings. Right now, most of them aren't very attractive. Redevelopment costs money. Seritage has only redeveloped about a third of its portfolio so far. It's not making enough rental income to sustain its redevelopment efforts yet. It doesn't have access to credit like a lot of other REITs do.
Seritage's sole creditor is Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.81%), Warren Buffett's company. Seritage owes a $1.6 billion term loan that it got from Berkshire Hathaway. It has a $400 million credit line from Berkshire that it cannot access until it hits certain leasing targets, which it isn't going to anytime really soon. That was the big concern in 2020 when Deidre just said that she was not feeling very optimistic about it. It's because there was a real big question mark about, are they going to have enough money, and if not, I've mentioned asset sales are one of the ways they raise capital. At some point, they're going to run out of the assets they want to sell. They don't want to start unloading their premier, high-value properties.
So that was the big question mark: Are they just going to have to start really essentially liquidating the business in order to satisfy their capital needs? Now that they have a little bit of breathing room, they ended 2020 with a little over $160 million in cash, which buys them at least a year's worth of runway in terms of how much money they're going through. Hopefully, they can get a little closer to the leasing target to be able to access their credit line. Not only is Berkshire Hathaway their biggest creditor, Warren Buffett is their biggest shareholder personally. He owns about 5% of Seritage in his personal, non-Berkshire stock portfolio. So Seritage is a very interesting company.