SRG - Potential 16% YTM With Seritage Preferreds

2023-10-06 16:52:17 ET

Summary

• Seritage Growth Properties is liquidating its assets.
• The company will pay liquidation value for the preferreds at $25/share at the end of 2024 after it pays off its senior debt.
• The preferred shares trade at $23 with a 7% ($1.75) coupon.
• If the company buys them at $25 a share next year, investors will get ~16% ytm.

Seritage Growth Properties ( SRG ) is a REIT focused on the ownership, development, redevelopment, management, and leasing of diversified and mixed-use properties. The company was spun off from Sears Holding in July 2015 to unlock the value of its real estate portfolio. Due to a variety of reasons, the unlocking of the value has not gone to plan, so the company got shareholder approval to liquidate the company late last year.

As the company sells its portfolio, it will first pay off its senior secured term loan, then pay off its preferred shares ( SRG.PR.A ), and then will pay the common shareholders.

As of the end of September 2023, the company has paid down $1.2 billion on its senior secured debt and has $400 million remaining. The preferred shares have a liquidation preference of $70 million. Given that, the company still has its best and most valuable properties to sell, it is very likely that the preferred shares will be paid off by the end of 2024.

So let's take a look at the properties that remain at the end of Q2.

Peterson Capital Management, during their annual meeting, broke down the property values remaining as of August 2023. The values look fair and reasonable. For example, the San Diego property is valued at $110 million. In 2016, it was valued at $165 million and Seritage has a 50 percent stake in it. This was before it was completely built out and fully leased. Granted cap rates have changed since then, but the point is that they have done extensive work to put in realistic figures.

If you add up all the asset values, it comes out to $1.2 billion as of August 2023, and they have about $650 million with debt, preferred and cap ex. It is now $570 million since they recently paid down another $80 million in debt at the end of September. As of August, the company had over $200 million in sales lined up as well. It is pretty clear that the preferreds will get their full liquidation value of $70 million or $25 a share.

Given that the rate of property sales will slow down due to higher interest rates, less properties and bigger properties, it is likely that the $400 million in debt will be paid off somewhere in 2024 and the preferreds will be paid off at the end of 2024 in my view.

Let's take a look at the terms of the preferreds.

The preferreds pay a 7% cumulative dividend with a liquidation value of $25/share. Today the shares trade around $23/share. If the shares are bought back in 1 year at $25 a share, the YTM will be almost 16%. This seems like a great deal.

The risks are that the company is not able to get the assumed value to cover paying back the preferreds. However, as you can see the chances of that are very slim. The other risk is that it may take longer than a year to pay back the preferreds. In this case, the YTM will be less than 16%, but at least you will be getting 7+% a year dividend while you wait.

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