Seritage Growth Properties (SRG 4.01%) is a rather unique REIT (real estate investment trust). Rather than focusing on generating income, Seritage's goal is to redevelop a portfolio of money-losing properties into premier retail assets, creating value for shareholders in the process. In this Fool Live video clip, recorded on Sept. 3, Millionacres senior real estate analyst Matt Frankel, CFP, discusses why he's a shareholder and what investors should keep in mind.
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Matt Frankel: Dev says, "Expert advice SRG stock." SRG is Seritage Growth Properties, a company I own in my portfolio and one of the riskier stocks that I follow. If you're not familiar, Seritage Growth Properties was created a few years ago specifically to spin off real estate assets owned by Sears, this is before Sears went bankrupt.
The plan was that over time, they knew Sears was going to decline, but over time they would redevelop these properties into premier, modern retail assets. Remember when most Sears properties were built, they were built in the best locations in town. A lot of their properties, even the ones that are abandoned, are located in very attractive locations.
There were two little hiccups in the plan that happened shortly after they went public: One, Sears' bankruptcy happened a lot quicker than expected, which left them with a lot more vacancies and as a real estate investment trust, less income than they had planned on, so that was one.
Number two, the COVID pandemic really hit their business hard, they really didn't have any wiggle room, Seritage actually loses money because to the nature of its business, it's a redevelopment REIT, so developing properties cost money, so the COVID pandemic hit it especially hard. Seritage recently brought on a new CEO, Andrea Olshan, who is from what I can tell is doing a great job. I'm trying to get her on this show actually, so hopefully, you'll hear from her soon. She is being a little more aggressive than her predecessor, she plans to relatively quickly sell about 50 properties, raise a lot of capital, and plunge it into the Seritage's most promising assets.
The company has a few, they have about 200 properties altogether, but only a few of them are the really really valuable ones, what they call their premier assets that could be developed into large-scale mixed-use shopping centers with 100s of apartment units on them and premier retail assets and a lot of space. They are opening their first one at the end of this year, they're planning on opening the second large-scale property in 2022, and if they can raise a lot of growth capital quickly, they can really accelerate this.
One of the things that investors should know about Seritage is their only creditor is Berkshire Hathaway (BRK.A -0.67%) (BRK.B -0.87%). Warren Buffett actually in his personal stock portfolio Seritage's biggest stockholder. Berkshire Hathaway gave Seritage a $1.6 billion term loan, that's how they finance their operations and they have a $400 million line of credit with Berkshire that they can only access once they hit certain leasing targets. They're not there yet, but their premier properties could potentially get them there.
The big thing that I think would move Seritage's stock higher quickly is if they were able to access their credit line or if it looked like they were going to be able to. Right now it doesn't work that way, this is a stock, to be clear, that's going to have a very binary outcome. They're trading around $15 a share right now. I've said before, in five years, I think this is either $100 stock or a $0 stock. There's pretty good cases to be made, either way, very binary outcomes. Like I said, it's a REIT that loses money, it doesn't pay a dividend, there's no clear path to profitability yet, hopefully, it'll get there in a couple of years. But I own some in my portfolio is not a big investment just because of the risk level involved so hopefully, that answered that.