Seritage Growth Properties is in a race to sell off dozens of properties over the next year and pay off $640 million in debt to billionaire Warren Buffett, a move that would buy the former real estate investment trust more time to turn itself around.
New York-based Seritage, spun off from department store company Sears nearly a decade ago, has hired real estate brokerage CBRE to sell a 38-property portfolio of mostly multitenant retail properties throughout the country as part of an effort to pay down a $1.44 billion loan from Buffett’s Berkshire Hathaway by July 2023.
Doing so would allow Seritage to reshape the portfolio, with a focus on large residential and mixed-use projects. It would be part of a broader strategy shift that many retail landlords have taken as a way to diversify their portfolios in response to rising online purchases and other changes in shopping habits.
Big REITs shifting focus to mixed-use developments include shopping mall giants Simon Property Group, Brookfield Property Partners and Macerich. Other REITs, including New York’s Urban Edge Properties and Pennsylvania Real Estate Investment Trust, have looked to replace older, unwanted retail space with a broad range of uses including apartments, healthcare, self-storage and entertainment.
In the wake of its separation from Sears, Seritage is years into an effort to reshape a sprawling portfolio of large, older properties. Many of them now are leased to one or more large tenants, and the portfolio no longer has any exposure to Sears or Kmart leases.
“They’re selling what they think has value, and it looks to be out of necessity,” said Brandon Svec, CoStar Group’s national director of retail analytics. “There could be a long-term strategy too, where they’re looking to exit the pure-play retail sector and gravitate toward master-planned mixed use, which is the flavor du jour in real estate.”
Efforts to sell off nearly one-quarter of the company’s properties come at a precarious time, With high inflation, rising interest rates and concerns about a recession creating uncertainty throughout the commercial real estate industry.
Seritage must overcome those challenges to reduce the balance on its 2018 loan from Berkshire Hathaway to $800 million by July 31, 2023. If Seritage accomplishes that, the maturity date of the loan will be extended by two years, according to securities filings. If it doesn’t meet the deadline, the full $1.44 billion loan will be due next July, a potentially devastating blow to Seritage.
In a loan default, Buffett’s firm could seize the remaining real estate or potentially negotiate new loan terms, likely at a higher interest rate than the above-market 7% Seritage is already paying.
Earlier this year, Seritage made a $160 million loan payment to reduce the principal to the current amount.
Since then, Seritage has announced a review of “strategic alternatives,” including a potential outright sale of the company.
About a month after that disclosure, Seritage said its board of trustees had voted to terminate its status as a real estate investment trust, becoming a C corporation retroactive to Jan. 1 of this year.
REITs are required to pay out at least 90% of their earnings as dividends. By eliminating its REIT status, Seritage can free up more cash to invest in redeveloping existing buildings and ground-up development.
The switch from REIT status gave Seritage “enhanced flexibility as to both the types of transactions available to us to pursue and the timing of those transactions,” CEO Andrea Olshan said in a statement in March.
The move also could aid the ongoing effort to sell off properties and pay down debt.
The de-REIT decision, a relatively rare step, created a one-time, noncash deferred tax benefit of $160.3 million, according to filings.
Seritage hired CBRE brokers to market a 38-property retail portfolio of properties throughout the country, Real Estate Alert reported last week. The properties are leased to tenants including Whole Foods, Dick’s Sporting Goods, HomeGoods, Dave & Buster’s, DSW, Nordstrom Rack, Five Below and several other tenants, with a reported 5.3 million square feet across 20 states.
A Seritage spokeswoman confirmed the company has put 38 properties on the market for sale, but she declined to comment further.
Seritage owned interests in 161 properties with 19 million square feet of leasable or build-to-suit area and about 600 acres of land under development or with plans in place for developments at the end of the first quarter, according to securities filings, with another 8.8 million square feet or approximately 740 acres to be sold off.
In all, the company had about 2,150 acres of land at the end of the first quarter.
As of May 9, Seritage had nine properties under contract to sell for a combined $85 million, after a recent sale of $74.7 million of properties, the company said. Another $636.3 million of properties were for sale or about to go onto the market, according to first-quarter filings.
If enough properties sell within the next year, Seritage said it expects the proceeds to more than cover the looming $640 million loan payment.
There’s also a provision in the loan agreement that would allow Seritage an additional $400 million in incremental financing. But Seritage has not met those conditions, which include rental income from non-Sears tenants to reach at least $200 million annually.
Seritage was created from properties spun out from Sears Holdings a few years before Sears Holdings filed for Chapter 11 bankruptcy in 2018. The new holding company for Sears and Kmart is called Transformco.
From its start, Seritage faced a yearslong struggle to turn outdated, Sears-anchored properties into steady, cash-generating investments. It remains a work in progress, which is reflected in the share price of less than $6, down from an all-time high above $56 in 2016.
A loan extension from Berkshire Hathaway would give Seritage more time to delve into time-consuming, but potentially lucrative, projects such as large, master-planned residential developments.
Former Sears CEO Edward Lampert owns a 22% interest in Seritage, but he stepped down as chairman of Seritage’s board of trustees in March.
In a May filing, Seritage said a review of its properties continues, but the company expects to reposition its properties into three business lines that it describes as “residential developments, premier mixed-use assets and multitenant retail destinations.”
The company’s 40 multi-tenant retail properties are almost 83% leased in triple-net deals that provide “an important inflation hedge,” while the “portfolio affords numerous further densification opportunities through the addition of pads on excess parking areas.” Properties with triple-net leases, where the tenant typically pays building expenses including taxes, insurance and maintenance, are considered one of the safest investments in real estate.
Seritage redevelopment opportunities could include residential, office, biotech and other space, in part by using underutilized parking areas and outlots.
The company also is focused on master-planned residential and mixed-use projects in high-growth areas of California, Florida, Texas and the Northeast.
“We are in the process of hiring a development services firm to augment our own internal development team in an effort to accelerate the entitlements of the properties,” according to a May filing.
There are 33 sites identified as potential residential sites, with an average of 14 acres per site.