Serage growth properties (NYSE: SRG) has been a meltdown for long-term investors since it launched as a real estate spin-off from Sears Holdings seven years ago. After an initial burst of investor enthusiasm, Seritage stock slumped from a 2016 high above $50 to just over $5 in late June.
However, shareholders finally got some relief in July. Seritage shares doubled to over $10 this month after the company announced plans to wind down operations, sell its remaining assets and return the net proceeds to shareholders. Even after this quick gain, Seritage Growth Properties should continue to grow as the liquidation process continues.
Asset sales are accelerating
Upon its separation from Sears Holdings in 2015, Seritage held interests in 266 properties. Over the next few years, it opportunistically sold some of its real estate to fund the costs of redeveloping other assets. This reduced its portfolio to 212 properties at the start of 2020.
Unfortunately, the COVID-19 pandemic has severely disrupted Seritage’s redevelopment strategy. Rental activity has slowed and many potential tenants have canceled plans to take up space at company properties. Under new CEO Andrea Olshan, Seritage has responded with a new plan to streamline its portfolio to between 120 and 130 sites.
Over the past year, Seritage has intensified its asset sale activities and expanded its asset sale plans. But despite this progress toward its long-term strategic goals, Seritage shares continued to sink. This ultimately forced the company’s management and board to take more aggressive action to close the gaping gap between its market value and the value of its underlying assets.
In early May, Seritage revealed that it had already sold $75 million in assets in the first weeks of the second quarter. He also had $85 million in real estate under contract and additional properties worth hundreds of millions of dollars available for sale. And in June, the company released the bulk of its portfolio of multi-tenant businesses: 38 locations worth up to $900 million.
In its boldest move yet, Seritage filed a preliminary proxy statement on July 7 asking shareholders to vote for a “sell plan” to liquidate the company. If shareholders approve the proposal, Seritage expects it could sell all of its assets and close its doors within 18 to 30 months.
Seritage’s board of directors estimates that after selling all of its properties and repaying all of its debt and other known obligations, it will make total distributions to shareholders between $18.50 and $29 per share. Considering the real estate company’s shares had been trading between $5 and $6 since mid-June, it’s no wonder the stock soared after the announcement.
Lots of uphill left
Based on its Thursday closing price of $10.41, Seritage shares are still trading within half of the midpoint of the company’s estimated payout range. While shareholders likely won’t see any payouts until 2023 or 2024, it looks like an irrationally large discount.
Investors seem very skeptical about the realism of Seritage’s estimated $18.50 to $29 payout range. However, the company has a number of top notch development sites. At the end of 2021, Seritage sold a property near San Francisco for the astonishing sum of $128 million. And just last month, he sold a vacant former Sears at Westminster Mall in Southern California for $46.3 million.
There may be 10 properties of comparable value remaining in Seritage’s portfolio, in addition to the 38 commercial properties that Seritage markets and dozens of other lesser assets. As a result, the estimated payout range of $18.50 to $29 per share appears likely to prove accurate.
One of the biggest remaining risks for shareholders is ongoing litigation on behalf of Sears Holdings’ bankruptcy claiming Seritage underpaid for its real estate. However, I expect Seritage to settle the litigation at a reasonable cost, which will impact shareholder distributions by approximately $1 per share.
With shares still trading at a roughly 50% discount to the cumulative payouts shareholders are likely to receive over the next few years, Seritage shares still look like a bargain.
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Adam Levine-Weinberg holds positions in Seritage Growth Properties (Class A). The Motley Fool recommends Seritage Growth Properties (Class A). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.