Seritage announces the inauguration of its first Premier project

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Monday afternoon, Seritage Growth Properties (NYSE: SRG) triumphantly announced the inauguration of its first flagship project: The Collection at UTC. CEO Andrea Olshan said: “The opening of Seritage’s first inaugural project is an important step in the transformation of our ongoing portfolio. … The Collection is an exceptional assortment of retail, dining, office and experience destinations, and I applaud the efforts of our leasing, development and investment teams on bringing our vision to life. “

It is true that Seritage has many other retail and mixed-use projects in its redevelopment pipeline. However, investors should not expect this step to be the start of a real turnaround for investors. REIT.

A promising project with many setbacks

Seritage is building The Collection in UTC on the site of a former Sears store adjacent to the Westfield UTC open-air mall in San Diego. Westfield UTC is one of the best malls in the San Diego market and recently received a $ 600 million renovation and expansion.

The Seritage site benefits from the high traffic and amenities of the shopping center, as well as the strong demographics of the surrounding area. It will likely appeal to retailers, restaurants, and entertainment tenants who couldn’t find the right kind of space in the mall itself. The REIT also hopes to expand the collection to UTC with office and residential components in the future.

Thus, this project clearly has great potential for Seritage. But the navigation was not smooth. At the start of 2019, management estimated that the project would be virtually complete by the end of the year. By the end of 2019, Seritage had leased 66.5% of the available space in The Collection from UTC and delivered storefronts to some of the early tenants.

Then the COVID-19 pandemic struck. Three of Seritage’s main tenants at The Collection at UTC were Equinox Fitness, the collaborative company Industrious, and Pinstripes (an upscale bowling-focused entertainment center). All three have been hit hard by the pandemic, and all three appear to have pulled out of the project. As a result, the collection at UTC was only 19.9% ​​leased as of June 30, 2021.

Many tenants who originally signed leases for The Collection at UTC have pulled out. Image source: Seritage Growth Properties.

Not really a big opening

While Seritage used the term “grand opening” in the title of its press release on Monday, only one tenant actually opened this week: the upscale seafood restaurant Pacific Catch. With 4,500 square feet of interior space, Pacific Catch represents just 2% of The Collection’s gross leasable area in UTC.

Seritage has indicated that several additional tenants will gradually open later this quarter and during the first months of 2022. Management also announced that 88% of The Collection at UTC is now “leased or under lease negotiations.”

However, there is a big difference between having a signed lease and having active negotiations. Some of the leases that Seritage is currently negotiating may never materialize. And even when Seritage finalizes other leases, it can take another year or more and require additional capital expenditure to complete tenant-specific construction and secure rent payments.

The same old story

While much of its real estate is of mediocre quality (at best), Seritage Growth Properties has several dozen assets with high potential for redevelopment. Unfortunately, Seritage may not have a good enough track record to capitalize on this potential.

By mid-year, Seritage had only $ 140 million in unearmarked cash. During that time, it burned cash at a rate of about $ 100 million per year, excluding redevelopment expenses. The REIT expects its ongoing redevelopment projects to cost $ 250 million over the next 24 months or so. Seritage will have to sell dozens of less promising properties to fund its short-term cash consumption and those redevelopment expenses. And even after completing all these projects, his cash flow will still be negative.

Perhaps management will be able to design creative financing structures that will allow Seritage to step up the pace of its redevelopment while reducing interest costs. Still, there is no guarantee that the REIT can overcome its weak balance sheet and appalling cash flow. Investors would be better off investing in companies that have a stronger financial footing.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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