Executive Summary / Key Takeaways

• Seritage Growth Properties ($SRG) is executing a shareholder-approved Plan of Sale to monetize its real estate assets, aiming to repay debt and distribute net proceeds. This marks a significant shift from its prior strategy as a traditional retail REIT.
• Recent financial results for Q1 2025 reflect this wind-down phase, with declining rental income due to asset sales, increased general and administrative expenses (partially due to severance), and an impairment loss on unconsolidated entity investments.
• A critical near-term focus is the Term Loan Facility with Berkshire Hathaway (BRK.B), which had an outstanding balance of $240 million as of March 31, 2025, subsequently reduced to $200 million by a $40 million prepayment in June 2025. The loan matures in July 2025, with an option to extend to July 2026.
• The company's liquidity is reliant on the successful execution and timing of asset sales, as property rental income does not currently cover operating obligations and development expenditures.
• Key risks to the Plan of Sale include challenging market conditions that could impact asset pricing and timing, as well as ongoing litigation that the company intends to vigorously defend.

The Strategic Pivot: From REIT to Monetization

Seritage Growth Properties originated from the Sears Holdings portfolio, initially operating as a real estate investment trust focused on owning, developing, and leasing retail and mixed-use properties. This early phase involved acquiring Sears properties and joint venture interests, often with leasebacks to the struggling retailer. Over time, the company embarked on a capital recycling program, selling off assets to reshape its portfolio.

A pivotal moment arrived in March 2022 when the Board of Trustees initiated a review of strategic alternatives and, importantly, approved a plan to terminate the company's REIT status, becoming a taxable C Corporation effective January 1, 2022. This change provided greater flexibility in utilizing cash flow by removing the requirement to distribute a significant portion of taxable income. Following this, shareholders approved a Plan of Sale in October 2022, fundamentally altering the company's mission to one of orderly asset liquidation, debt repayment, and eventual dissolution.

Executing the Plan of Sale

The Plan of Sale is now the central operational focus for Seritage. The company's primary objective is to create value for shareholders through the monetization of its real estate holdings. This involves actively marketing and selling properties, with management stating an anticipation to market a majority of remaining assets throughout 2025.

Since the capital recycling program began in July 2017, Seritage has generated substantial proceeds. From the Plan of Sale approval in October 2022 through March 31, 2025, the company sold 90 consolidated properties and outparcels, generating approximately $1.0 billion in gross proceeds. Additionally, interests in 10 unconsolidated properties were sold during this period, yielding about $151.5 million. In the first quarter of 2025, the company sold one consolidated asset for gross proceeds of $29.6 million, resulting in a gain of $6.9 million. As of March 31, 2025, the portfolio consisted of interests in 16 properties, comprising approximately 1.6 million square feet of GLA and 240 acres of land.

Operational Approach and Competitive Context

Seritage operates within the broader U.S. retail real estate sector, but its current strategic focus on liquidating a portfolio largely derived from a distressed retailer sets it apart from traditional retail REITs like Simon Property Group (SPG), Kimco Realty (KIM), Macerich (MAC), and Tanger Factory Outlets (SKT). While these competitors focus on managing and growing established mall, shopping center, or outlet portfolios, SRG is in a wind-down phase.

SRG's operational efforts are geared towards enhancing the sale value of its remaining assets. This includes strategies such as leasing available space, pursuing densification opportunities, securing necessary entitlements, and modifying existing agreements related to the properties. Compared to larger, more diversified peers like SPG or KIM, SRG operates at a significantly smaller scale, which can impact its overall market share and potentially its negotiating leverage in sales. While some analysis suggests SRG may possess cost efficiencies in its targeted redevelopment efforts compared to peers, its overall financial metrics, such as negative margins and lower cash flow generation, reflect the challenges inherent in liquidating a portfolio and contrast sharply with the profitability and scale of larger competitors. The company's reliance on asset sales for liquidity also differentiates it from peers who primarily rely on rental income and traditional financing.

Financial Performance Under the Plan

The financial results for the three months ended March 31, 2025, illustrate the impact of the ongoing asset sales and the strategic shift. Total revenue decreased to $4.60 million from $5.77 million in the prior-year period, primarily due to the sale of income-producing properties in 2024. Property operating expenses also decreased, falling to $2.91 million from $3.67 million, a reduction largely attributable to asset dispositions, although partially offset by an increase in insurance expense.

General and administrative expenses saw a notable increase, rising to $15.69 million from $9.19 million, primarily driven by the recognition of severance expense. Depreciation and amortization expenses decreased significantly to $2.08 million from $5.27 million, reflecting the reduced asset base due to sales. The company's equity in loss of unconsolidated entities increased to $7.93 million from $0.38 million, primarily due to the recognition of $8.5 million in other-than-temporary impairment losses on these investments during the quarter. Interest expense decreased to $5.23 million from $7.01 million, a benefit of the partial paydowns on the Term Loan Facility made during 2024. Overall, the company reported a net loss of $22.20 million for the quarter, compared to a net loss of $18.99 million in the prior-year period.

Liquidity and Capital Structure

Seritage's liquidity position is tightly linked to the execution of its Plan of Sale. The company's property rental income does not currently generate sufficient cash flow to cover its operating obligations and certain development expenditures. For the three months ended March 31, 2025, the company reported net operating cash outflows of $9.2 million.

Funding for these obligations and development costs is expected to come from existing cash on hand and proceeds from asset sales. A critical component of the company's capital structure is the Term Loan Facility with Berkshire Hathaway. The outstanding principal balance on this facility was $240 million as of March 31, 2025. The company has been actively paying down this debt, with total repayments reaching $1.4 billion since December 2021, including a recent $40 million voluntary prepayment made on June 11, 2025, reducing the outstanding balance to $200 million. The Term Loan Facility has a maturity date of July 31, 2025, with an option available to the company, at its sole discretion, to extend the maturity to July 31, 2026, upon payment of a 2% fee on the then-outstanding balance. Access to a $400 million incremental funding facility under the loan agreement remains subject to achieving certain rental income thresholds, which the company has not yet met.

Outlook and Key Considerations

The outlook for Seritage is centered on the successful and timely execution of the Plan of Sale. Management's stated priority is to repay the remaining debt from the sale of assets and maximize value for shareholders. The company anticipates that a majority of its remaining assets will be actively marketed for sale throughout 2025.

The timing and amount of any distributions to common shareholders are contingent upon the paydown of the Term Loan Facility and the net proceeds realized from asset sales after covering all obligations. As of May 15, 2025, the company had one consolidated joint venture asset under contract for sale, with anticipated proceeds of $14 million, subject to closing conditions.

Risks and Challenges

Executing a large-scale asset liquidation plan is subject to significant risks. Challenging market conditions, including elevated interest rates and broader macroeconomic factors, could exert downward pressure on asset pricing and impact the timing of sales. These conditions are expected to continue to adversely affect the proceeds realized from the Plan of Sale and, consequently, the amounts and timing of potential distributions to shareholders.

Furthermore, the company is facing significant litigation, including a class action lawsuit alleging violations of federal securities laws related to disclosures concerning internal controls and asset valuation. Derivative lawsuits have also been filed making similar claims. The company has stated its intention to vigorously defend itself against these allegations. The outcome of these legal proceedings could have a material impact on the company's financial position and the ultimate value available for distribution to shareholders. There can be no assurance that the Plan of Sale will be fully executed or that the company will be successful in achieving value-maximizing transactions.

Conclusion

Seritage Growth Properties is fundamentally an asset monetization story driven by a shareholder-approved Plan of Sale. The company has made substantial progress in liquidating its portfolio and reducing its debt burden, particularly the significant paydowns on the Term Loan Facility. The near-term focus remains on addressing the July 2025 debt maturity, with the extension option providing a potential buffer.

The success of this strategy hinges on the company's ability to continue executing asset sales efficiently in a challenging market environment. While operational efforts are underway to enhance property values ahead of sale, macroeconomic headwinds and ongoing litigation represent material risks that could impact the pace and proceeds of the liquidation. Investors in SRG are betting on the company's ability to navigate these challenges to successfully repay its remaining debt and ultimately return capital through the Plan of Sale.