Seritage (SRG, Financial) is the real estate holding spin-off from Sears Holdings (SHLD, Financial) and has the ability to develop a lot of its land. The stock is a major holding of Fairholme and Edward Lampert’s hedge funds.
The company has 55.767 million shares, trades at $51.27 and has a market cap of $2.859 billion. As of the first half of the year, the company produced $59.721 million in funds from operations. So for the year, we’ll assume they do $119.4 million, or $2.32 a share. The dividend for the first half of the year was 50 cents, so I’m going to say it’s $1 for the year and a 1.9% yield.
Seritage has 235 wholly owned properties and 31 joint ventures; 224 are leased to Sears Holdings. This encompasses 42 million square feet across 49 states and Puerto Rico. Â The properties are 99.7% leased — very impressive. The joint venture operators are pretty sharp: GGP, Simon and Macerich. There’s an art to mall space and these three are pretty good at it.
Seritage makes $4.30 per square foot leasing to Sears Holdings, $11.98 leasing to third parties, and $22.79 in signed but not opened leases. Figuring a net asset value for the company is not easy. I asked an industry expert and he said that on average, mall space rents for $10 a square foot. That’s right in line with what the company is receiving.
The balance sheet shows $150.7 million in cash and $17 million in receivables. This is to $1.145 billion in mortgages and $114.5 million in accounts payables.
I found Seritage while perusing Fairholme Fund (Trades, Portfolio)'s holdings. Berkowitz’s comments can be found here on GuruFocus. He said that much of this land can be repurposed into and rented to other retailers, sometimes for up to $100 a square foot. There are three different share classes, some of which have different voting classes. Eddie Lampert’s fund has a different series of stock that has voting priveledges. According to the 2015 Annual Report, “As of Dec. 31, 2015, ESL beneficially owns approximately 43.4% of the Operating Partnership units, and approximately 3.9% of the outstanding Class A common shares and Class B non-economic common shares having, in the aggregate, 9.7% of the voting power of Seritage. ESL also beneficially owns approximately 49.6% of the outstanding common stock of Sears Holdings.”
Viewing their holdings across the country, I am familiar with a few of them. One is in Santa Monica, Califiornia. It’s 117,800 square feet and sits on three acres. Some of the most expensive mall space in the country is a few blocks away on the Third Street Promenade. My ball park guess is that it’s $250 million. My ballpark guess on a value per square foot on the overall portfolio is $200 a square foot. At 42 million square feet, that’s $8.4 billion. Minus all liabilities, you get a little over $7 billion. So at a market cap of $2.859 billion, it’s definitely trading at a discount to NAV. If I’ve guessed way too high on the $200, the stock still trades at a discount to NAV.
You can see why these investing gurus are in Seritage. The land it holds is prime. My concern is that this is all predicated upon a strong economy. Do you remember when Circuit City went bankrupt? How about Washington Mutual? How did their landlords do? That’s my knock on the company. The stock market is at an all-time high and interest rates are at an all-time low. With a 1.9% dividend yield, I kind of think it is not a great time to buy, but who knows what the markets are going to do.
Disclosure: We own shares in the Fairholme Fund (Trades, Portfolio).
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