On Monday afternoon, Seritage Growth Properties (SRG) triumphantly announced the grand opening of its first premier project: The Collection at UTC. CEO Andrea Olshan stated, "The opening of Seritage's inaugural premier project is a significant milestone in our ongoing portfolio transformation. ... The Collection is an exceptional assortment of retail, dining, office and experiential destinations, and I commend the efforts of our leasing, development and investments teams on bringing our vision to fruition."
It's true that Seritage has many more premier retail and mixed-use projects in its redevelopment pipeline. Nevertheless, investors shouldn't expect this milestone to mark the beginning of a real turnaround for the struggling REIT.
A promising project with plenty of setbacks
Seritage is building The Collection at UTC on the site of a former Sears store adjacent to the Westfield UTC open-air mall in San Diego. Westfield UTC is one of the top malls in the San Diego market and recently received a $600 million renovation and expansion.
Seritage's site benefits from the mall's high traffic and amenities, as well as the surrounding area's strong demographics. It will likely appeal to retailers, restaurants, and entertainment tenants that could not find the right kind of space in the mall itself. The REIT also hopes to expand The Collection at UTC with office and residential components in the future.
Thus, this project clearly has high potential for Seritage. But it hasn't been smooth sailing. As of early 2019, management estimated that the project would be substantially complete by the end of that year. As of the end of 2019, Seritage had leased 66.5% of the available space in The Collection at UTC and had delivered storefronts to some of the first tenants.
Then, the COVID-19 pandemic struck. Three of Seritage's lead tenants at The Collection at UTC were Equinox Fitness, co-working firm Industrious, and Pinstripes (an upscale bowling-focused entertainment center). All three were hit hard by the pandemic, and all three appear to have pulled out of the project. As a result, The Collection at UTC was just 19.9% leased as of June 30, 2021.
Many of the tenants that originally signed leases for The Collection at UTC have backed out. Image source: Seritage Growth Properties.
Not much of a grand opening
While Seritage used the term "grand opening" in the headline of its press release on Monday, only one tenant actually opened this week: upscale seafood restaurant Pacific Catch. With 4,500 square feet of indoor space, Pacific Catch accounts for just 2% of The Collection at UTC's gross leasable area.
Seritage indicated that several additional tenants will open on a rolling basis later this quarter and in the first few months of 2022. Management also announced that 88% of The Collection at UTC is now "leased or under active lease negotiations."
However, there's a big difference between having a signed lease and having active negotiations. Some of the leases Seritage is negotiating now may never come to fruition. And even when Seritage does finalize more leases, it could take another year or more and require additional capital expenditures to complete the tenant-specific build-out and get rent payments flowing.
Same old story
While much of its real estate is of mediocre quality (at best), Seritage Growth Properties does own several dozen assets with high redevelopment potential. Unfortunately, Seritage may not have a good enough balance sheet to capitalize on that potential.
As of mid-year, Seritage had just $140 million of unrestricted cash. Meanwhile, it has been burning cash at a pace of roughly $100 million annually, excluding redevelopment spending. The REIT projects that its in-process redevelopment projects will cost $250 million over the next 24 months or so. Seritage will need to sell off dozens of less-promising properties to fund its near-term cash burn and this redevelopment spending. And even after completing all those projects, its cash flow will still be negative.
Perhaps management will be able to devise creative financing structures that enable Seritage to accelerate the pace of its redevelopment work while reducing interest expense. Yet there's no guarantee that the REIT can overcome its weak balance sheet and dreadful cash flow. Investors would be better off investing in companies that stand on a firmer financial footing.
