Seritage Growth Properties: Final Stages of Liquidation

Seritage Growth Properties (SRG) (~$90MM market cap) is the former PropCo formed in a 2015 rights offering to hold a portfolio of Sears (SHLD) free-standing and mall adjacent locations.  The original idea was to renovate and lease the former Sears boxes as they became vacant, eventually turning into a diversified retail REIT.  That thesis never sit well with me because many of their properties were attached to dying malls they didn't own or control (SRG just owned the Sears anchor location), plus as a REIT (SRG converted to a C-Corp in 2022) they had to payout substantially all of their cash flow to shareholders making it challenging to fund the remodel.  The strategy eventually failed and company's shareholders approved a liquidation ("Plan of Sale") on 10/24/22, the sale process has been ongoing since with several disappointments along the way.  Just about any and all enthusiasm for the former special situation darling is gone.  Today, only 8 real estate assets remain, the liquidation should be in its final stages and wrapped up within the next 1-2 years (famous last words!).

The remaining real estate (valuations are my estimates, played around with some AI tools to validate, should be reasonably conservative but feel free to push back):

• King of Prussia: This is the old Sears anchor location attached to the large class A mall in suburban Philadelphia owned by Simon Property Group (SPG).  It's partially stabilized with tenants including Dick's Sporting Goods, Primark and Yard House, but it has a 34k SF vacancy that its been trying to fill since 2020.
• Park Heritage Dallas: Another former Sears anchor mall location, back in June of this year, SRG entered into an option purchase and sale agreement with a developer for $50.8MM.  The buyer is paying a monthly payment ($126,900/month in 2026, bumping up to $274,950/month in 2027) until they close (expiration date of 1/31/28).
• Overlake Plaza: This property is a free standing big-box redevelopment, the property has been rezoned for mixed use and sits pretty closely to Microsoft's campus.
• Westfield UTC: Alongside JV partner Invesco, located in San Diego, the current property is a former Sears anchor mall location redeveloped into mixed use retail/office with some land optionality for additional mixed use development.  This property is likely the fulcrum asset with a lot of valuation uncertainty.  We don't know the terms of the Amazon lease or a lot of details around the structure of the JV, but based on the ~$15MM NOI, this asset could be the most valuable remaining.  The owner of the mall, URW, entered into a deal in June to purchase out their own JV partner for $705MM, implying a $1.4B valuation for what URW calls a "A++" asset, they'd be a natural buyer for the SRG property.
• The other four unconsolidated properties are in various stages of redevelopment and are likely less meaningful to the final liquidation value.

Here's my back of the envelope math on SRG's liquidation value:

The question with all real estate liquidations in particular is "how long will it take?", here with SRG we're already into year 5 of the Plan of Sale.  The time issue is of critical importance due to the ~$20MM annual corporate overhead, arguably ridiculous for what's a relatively small asset base and a tiny market cap.  A couple of interesting nuggets that may suggest added pressure to wrap things up: 1) CEO Adam Metz (former CEO of GGP that led it through restructuring) signed a 6-month employment agreement in July with a company option for another 6-months; 2) At the most annual shareholder meeting, none of the six directors received the requisite 2/3rds affirmative vote (Eddie Lampert continues to own 23.8% of the company), however due to SRG's Maryland domicile, all were retained anyway.

The preferred stock is also an interesting security, even in a pretty bearish scenario the remaining assets should more than cover the $70MM liquidation preference, yet it trades at a little over $20/share.  The biggest concern with preferred stock is the possibility of being orphaned in a change of control transaction, but with minimal cash flow and no real franchise value to the remaining assets, I don't see a potential buyer retaining the SRG corporate structure and preferred stock.  But it's a small possibility (if SPG buys it, maybe?).  I don't own any of the preferred stock at the moment, but considering it.

Disclosure: I own shares of SRG