1 Under-the-Radar Stock With Tons of Long-Term Potential

Seritage Growth Properties (SRG 2.04%) isn't exactly a household name, but this real estate investment trust (REIT) could have some serious value-creation potential over the next decade or so. In this Fool Live video clip, recorded on March 25, Fool.com contributor Matt Frankel, CFP, discusses Seritage's business and why it's such a unique opportunity for patient long-term investors. 

Matt Frankel: So, I will start with Seritage Growth Properties, SRG. One of my favorite stocks to cover. I want to say it gets no love in the Motley Fool universe, but I feel like it's an underappreciated company. Brian, just let me ask you real quick. Are you familiar with Seritage?

Brian Feroldi: Nope.

Frankel: If I were to pitch you this line, how excited would you be? Seritage was a real estate company that was specifically created to buy a bunch of old Sears buildings. Doesn't sound too appealing. Right. That's one of the big reasons it's underappreciated by a lot of investors. Seritage was specifically created in 2015 to buy a bunch of old Sears properties.

I often joke that nobody wants to own a Sears building. Seritage was created because even Sears didn't want to own a Sears building at that point. But the point is not to own Sears buildings, Seritage's business model is to own all of these Sears buildings and gradually redevelop them into modern mixed-use premier retail and entertainment assets.

The point is that when Sears were built, say in the '70s or '80s or whenever they were built, they were generally the premier shopping locations wherever they were. A lot of these properties are in fantastic areas, I'm going to give you a few examples in just a minute. But there is a ton of value creation potential here.

Seritage owns 183 Sears properties with about 28.5 million square feet of space. This is a pretty big portfolio, only about one third of that has been redeveloped so far. None of it is occupied by Sears. There were a few Sears stragglers, there are some Sears at existence today still, believe it or not, but none of them are in Seritage as property. The only rent they collect is from that one third of the portfolio that has been released.

Of their properties, some of them they plan to sell, a few of them. They break their portfolio into three categories, they have their large-scale premier assets, which is where the most of their value-creation potential is. These have pretty much not been touched yet. Those are 31 of the properties that comprise almost 6 million square feet of space. These are large-scale. Picture almost the size of a full-scale model that they can redevelop and create a lot of value. A hundred and thirty of them are Suburban retail assets, as they call them. This is where most of the redevelopment has been concentrated so far. For example, they might take an old Sears store and convert it into a Total Wine, a restaurant. I know Dave and Buster's (PLAY 2.84%), this's one of their tenants, things like that to break it up into three or four different storefronts. They have 22 small market assets that they're planning to sell that are just non-core properties, and that's really how they fund their growth. Unlike most, it's a real estate investment trust.

Unlike most real estate investment trusts, Seritage is not profitable. As I mentioned, only one third of their portfolio is generating rent. I'm a landlord, if one third of my portfolio is generating rent, I'm not making any money. They need to sell properties to fund their redevelopment. They got absolutely crushed stock price-wise during the pandemic. They're still trading for about half of what they were before the pandemic. The reason is there is a big liquidity question hanging over their heads. Seritage has one creditor, their creditor is Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%). Berkshire Hathaway financed a $1.6 billion term loan to get the business going. Warren Buffett is the biggest Seritage shareholder of their common stock personally, not Berkshire, in its personal stock portfolio.

They also have a $400 million credit line from Berkshire that they can't tap into because they haven't redeveloped enough for their properties yet. They need to get $200 million of non-Sears leases in place, they are at about 150 right now. Until they can do that, their really own only funding source is selling their other assets. There's a lot of market worry about how long that could last, but the value creation potential here is just completely unappreciated.

Seritage has a market cap of less than a billion dollars. One large-scale redeveloped mixed-use property of Seritage's scale could be worth a billion dollars if it's done correctly. Looking at some assignments malls, some assignments malls are valued at three or four billion dollars, so a lot of value creation potential. I mentioned they own about 28.5 million square feet of space. I'm going to share my screen real quick if I may, just for a minute, then I'll let Brian talk.

Here's an example of one of Seritage's properties. You could see even Sears building being right here in the middle, and they don't just own the Sears building. If you see this red line, they own all this land that's around it, that it's just sitting there as a parking lot space right now. One of their core strategies is to add densification to their properties, meaning they turn half of this parkwide into a garage and the other half into a high-rise apartment building or something to that effect. One of their properties is located in Alexandria right now. Can you still see this? This is in Alexandria, not far from Fool HQ.

They just entered an agreement with Howard Hughes Corporation (HHH 3.74%) and a healthcare company to redevelop this whole big plot of land into a giant, multi-billion-dollar mixed-use property. They own this Sears building, which is big enough as it is, it's over 100,000 square feet all by itself. See the little outbuilding -- I think that's a Sears Auto Center out there, they own all this land. There's going to be a healthcare campus built here, some apartments, giant redevelopment opportunity. It's just 28.5 million square feet of prime potential space. It sounds like a lot, but it's even more than that. There's all this acreage that they can redevelop and add densification. That's the reason I'm so excited about Seritage over the long run. It still trades at a massive discount. They really have some funding issues to work out. But if they can figure it out, there is a ton of potential here.