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Seritage Growth Properties' Vision Is Finally Starting to Come to Life

By Matthew Frankel, CFP® and Jason Hall – Nov 5, 2021 at 7:13AM

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This redevelopment-focused REIT just took a big step in the right direction.

Seritage Growth Properties (SRG 1.93%) hasn't given investors a ton to smile about recently: The company has been losing money for years and the COVID-19 pandemic was a major setback for its redevelopment ambitions. Fortunately, Seritage finally seems to be making real progress toward its goals. In this Fool Live video clip, recorded on Oct. 22, contributors Matt Frankel and Jason Hall discuss the latest development and what it means. 

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Matt Frankel: This is Seritage Growth Properties. If you're not familiar, this is a real estate investment trust that was formed to own a bunch of old Sears properties. Just using that description, it probably sounds terrible, but the goal is to redevelop those properties over time in mixed-use, premier assets, I guess you would say, like modern retail, restaurants, things like that, entertainment venues, things like apartments, is a big focus of theirs.

The news today, Seritage has a pretty big portfolio, but only three of their properties they consider premier assets. Let me share my screen for just one second before I kick it over to you guys. You see that little picture right there? This is their property, it's in San Diego. This is the first of their three premier assets, and they announced that their first tenant opened this week. If you see the red line in the middle of that picture, that's what Seritage owns. You can see the ocean in the background, gives you a really good idea of just what a great location this is. The big building in that red line is the old Sears property. The little outbuilding that has Crate & Barrel next to it, that used to be a Sears Auto Center, that's not part of this project you're talking about, but it is a property they own.

The Sears building sits on about 13 acres of land, and their first tenant, which is a seafood restaurant, just opened this week. Now, the big news isn't the seafood restaurant, it's that this is the first of a rolling opening of tenants in this new project of theirs that will take place over the next year or do. These premier assets, even though it's three properties out of about 180 in their portfolio, where the majority of the value creation potential lie at least in the near-term sense. That's what's going to hopefully get them to profitability. I think Jason is a shareholder of Seritage. I'm not sure if Matt is, but we'll go to Jason first on this one. What do you think of this news?

Jason Hall: I think this is one of the things we're going to have to contextualize. First of all, if we were to do that same headline test here, the headline would be "troubled real estate investment company signs restaurants to a lease." That alone is like, "Huh." The other thing, too, is let's step it up. What does it really represent? This is less than 200,000 square feet, these developments. That's like one-tenth of 1% of its real estate portfolio. Even looking at this entire development, it's a small piece of its entire asset.

From those perspectives, this is absolutely not material. It's not material in and of itself. But it's really notable, and it's really important because of what it tells us in terms of the trajectory. This is a business, we go back, I don't want to belabor this, but we go back to when Seritage was created. It was a business to take these troubled assets, sell off the junk, find the gems, develop the gems, and make something tremendous with them. Access to credit was there. I think Berkshire Hathaway (BRK.A -0.57%) (BRK.B -0.56%) was the major lender, but they were going to have to get to some certain metrics on rents to get there. Then the pandemic happened.

Frankel: Now, they've totally admitted they're not going to get there. That loan matures in 2023, by the way. They've admitted that they're not going to get there by that point.

Hall: Exactly. The pandemic basically killed that. It just made that a non-thing. The business has been in a perpetual state of churn. There's a new CEO that came in what? Five months ago.

Frankel: New CEO, new CFO, and new president, all women. The first REIT to have women in all the three top positions ever.

Hall: They have a real strategy that they are absolutely executing on it. This is like the first major combination of that strategy. What it signals, I think, is really important and far more important than what the material result is.

Frankel: The new CEO has gotten much more aggressive and is really doing a great job executing.

Matthew Frankel, CFP® owns shares of Berkshire Hathaway (B shares) and Seritage Growth Properties (Class A). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Seritage Growth Properties (Class A) and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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