Seritage Growth Properties (SRG -2.08%) is far from a household name, but this real estate investment trust could be worth a closer look for risk-tolerant investors. In this Fool Live video clip, recorded on May 14, Fool.com contributor Matt Frankel, CFP, discusses with chief growth officer Anand Chokkavelu why Seritage is such an interesting stock at its current low valuation.
Anand Chokkavelu: Matt, we've got one that maybe folks aren't as familiar with, Seritage.
Matt Frankel: Yes, I'd say if there was one that surprised me that all three of us own, it would probably be Seritage. I'm not surprised I own it, because I'm a real estate guy but I could talk about Seritage for like an hour so feel free to cut me off if go too long on this. Seritage was created in 2015 and it was created for a specific purpose, to buy a portfolio of real estate assets owned by Sears. Now, that might sound like a terrible investment. Who wants to be a Sears landlord? Sears didn't even want to be a Sears landlord, which is why Seritage was created. Seritage right now, owns about 180 properties, most of which were formerly occupied by Sears or K-Mart. A lot of them are vacant. About 2/3 of the portfolio is currently vacant. The thesis is that these properties, when you think of when most Sears were built, they were the premier shopping destinations in their market. These are great locations, huge properties that you can redevelop into premier modern mixed-use assets. Just for example, one of their properties in Wisconsin. I think it was a K-Mart that they turned into a space that now has a Dave and Buster's (PLAY 0.12%), a Total Wine, a few other smaller retail and restaurant spaces, things like that. They have a bunch of larger-scale, what they call their premier assets that have particularly high potential. I'm going to mention one specific example in a second, but these have the ability to add things like apartment buildings, hotels, hospital campuses as the one I'm about to talk about.
One thing that a lot of people miss, I mentioned Seritage owns about 180 properties. There's about 26 million square feet of space in the buildings themselves. They also own a great deal of land. When you think of the Sears, there aren't real Sears anymore in most places. But if you think about a Sears that was attached to your local mall, it probably had a giant parking lot in auto center, a huge plot of land, Seritage owns those as well. I want to share my screen for just one second, I promise I'll keep this brief. But this is a property in Alexandria, Virginia, close to where Anand is sitting right now. Anand, do you know where the Landmark mall is?
Chokkavelu: I certainly do.
Frankel: All right.
Chokkavelu: Just a few miles from Fool HQ.
Frankel: This is owned by two stocks that I own. Howard Hughes Corporation (HHC -0.50%) owns the mall itself, and Seritage owns the Sears building. If you see that red outline there, that Sears building itself is about 260,000 square feet. Just to give you an idea of the scale here, look at all of that land that they own, that they could redevelop. They're going to redevelop this property along with Howard Hughes into a 4 million square foot multi-billion-dollar project with a hospital campus, a couple thousand residential units, a lot of retail and restaurant, and entertainment space. Seritage currently has a market cap of about $680 million. One high-quality mall can be worth that much. I mentioned this is going to be a multi-billion-dollar project. The idea is they're taking these old dilapidated buildings and just add value to them over time. There are some big backers here, Warren Buffett himself, not Berkshire, Warren Buffett himself is the company's biggest investor. Berkshire Hathaway is their sole creditor. They have a big term loan from Berkshire, and they also have a $400 million credit line which they can't access yet, and that's the biggest question mark that's holding the valuation down. To get that credit line, they have to have at least $200 million of non-Sears leases signed. They're at about $130 right now, so they're not that close. Right now they have about $140 million in cash. They're burning money at a rate of close to $20 million a quarter. They're really relying on selling non-core assets to fund their redevelopment activities right now, where they don't want to have happen is having to start selling their premier assets to start funding development, which is the biggest risk right now. If they can get things together and get their financing questions answered, there's a ton of value-creating potential here, and I'll stop with that.