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My Top REIT Picks: Retail Sector Update - Seritage Soars

Summary

My three retail REIT blue-chips continue to outperform the S&P 500 and broader REIT sector.

However, my diamond-in-the-rough bonus pick has now outperformed my retail blue-chips by a considerable margin.

Is now the time to cash in some Seritage Growth REIT chips?

Source: Benzinga

Since my February 2016 update of my top retail REIT picks, my bonus pick, Sears REIT Seritage Growth Properties (NYSE:SRG), has become a momentum stock.

There is really no other way to explain the meteoric rise in SRG shares, which have now exceeded my upbeat expectations.

Meanwhile, other sector players with large Sears Holdings (NASDAQ:SHLD) exposure continue to struggle, which has resulted in distributions with double-digit yields for CBL & Associates (NYSE:CBL) and WP Glimcher (NYSE:WPG).

While I generally do not recommend REITs for trading, Seritage has now generated some huge short-term gains for readers who took my advice and jumped aboard.

Here's why readers should now consider taking some chips off of the table.

Seritage Alchemy - Advantage

Seritage has the "advantage" of a preponderance of vintage leases with Sears and Kmart at ~$4.30 per SF. The property level net operating income (NOI) rises exponentially each time Seritage successfully releases or redevelops legacy Sears Holdings store locations for 3x-10x higher rents.

The credit profile of each property also is enhanced by these new tenants, which results in a virtuous cycle of value creation.

My bullish thesis on Seritage at the end of last year is available to SA PRO subscribers here. My positive take on Seritage in light of Sears Holdings' awful Q4 2015 performance and Seritage's upbeat Q4 2015 performance are discussed here and here.

One of the key takeaways from my previous articles was that the overall quality of the Seritage portfolio of assets is better than the Class-B malls. (Exhibits which clearly illustrate that assertion are contained in those linked SA articles.)

Seritage Opportunity - Overview

Seritage can allocate capital to top owned locations plus its JVs with the three largest Class-A mall landlords. As of Dec. 31, 2015, the Seritage portfolio was over 99% occupied. The longer Sears Holdings can remain solvent and fund its asset-light transformation, the better it is for Seritage.

Currently, 24% of SRG revenue is being derived from tenants other than Sears/Kmart, and this will continue to escalate. At some point down the road, the scales will tip, and more revenues will be generated by better quality retail tenants.

However, there is no clear path or timetable. Notably, management did not host a conference call to discuss last quarter's results. Meanwhile, this value-creation...


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