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Seritage Still Priced For Perfection


  • Seritage reported Q1-2018 numbers.
  • While Sears still appears to be hanging around, store closings have meant that Seritage has not even covered its dividend for two straight quarters.
  • Taking into account potential capital raises and assets sales, Seritage will likely deliver less returns than most REITs on the market today, but with much higher risk.

Seritage (NYSE:SRG) reported Q1-2018 numbers that were about in line with what we expected. A large number of properties were handed back to them in the previous quarter by Sears Holdings (SHLD) resulting in continued weak performance. That was surely priced in. However, bulls have to be cognizant of how vulnerable the company is to a SHLD bankruptcy. Further, the capital raises that are poised to happen between now and a fully leased up Sears-Free portfolio will likely destroy significant amounts of upside that the bulls believe to exist. Allow us to show the numbers.

Where SRG has made progress

Redeveloping properties is a long slog and specially when you have been handed a portfolio that pretty much comprises the worst retailer on the planet, it will take time. However, from Q1-2016, where Sears comprised a whopping 73.3% of base rent,

Source: Q1-2016 supplemental

SRG appears to have made some progress.

Source: Q1-2018 supplemental

Sears is now down to just 45.7% of total rent. Certainly one can argue that the total vulnerability to Sears has decreased.

Why the numbers are actually quite bad

After two years of boasting about large redevelopment spreads, total annual rent is just up a mere 4% (from $208.3 million to $216.6 million). The reason is that the property and joint venture sales that SRG has had to do to finance this level of capital expenditures.

This number includes all signed but not yet operating leases as well, so several quarters ahead of upside to EBITDA are included in the numbers above. The current numbers are actually quite horrid with actual adjusted EBITDA coming in way below 2017 numbers.

During the quarter SRG sold properties worth over $60 million to finance the ongoing developments and we expect this trend to continue.

Source: Q1-2018 10-Q

Extrapolating the

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