Key points:
- Seritage announced plans to sell itself
- But the REIT nature of the company might mean asset valuations aren't much different
- Unwrapping a REIT might not make much difference that is
Seritage Growth Properties (NYSE: SRG) stock jumped 10% yesterday and a further 55% today on the news that the company is putting itself up for sale. Given the recent stock price performance this may well be a good idea. However, it's possible to think that the stock price movement here is overdone.
The thing is that Seritage is a REIT – that's a specific form of company that doesn't get taxed at the corporate level in return for agreeing to pay out 90% of net income to stockholders. That specific tax status isn't quite the point here though, but the implication is. REITs aren't really about changes in capital values, they're about income flows. The income flow from an asset is what determines its capital value and that's rather independent of how it is owned or even who owns it.
It's not, therefore, entirely obvious that unwrapping a REIT into its constituent parts in a sale is a great value add. For the income before the unwrapping, in the REIT, near all flows to stockholders. The income after the unwrapping will flow to the new owners sure – but the prices they'll be willing to pay will be based upon the values of those income streams.
Also read: Asset Groups To Invest In During Inflation.
As we can see from the Seritage Growth stock price chart everyone's hoping they're going to do something of course. Seritage is best thought of as an offshoot of Sears Holdings. It picked up a retail portfolio from Sears back in 2015. The idea was that by emerging the retail property from the retail business then the two valuations would be higher than as one single one.
But it's rather the same idea here that is driving that jump in the Seritage stock price on this news of the sale plan. The idea that the assets individually are going to be worth more than the assets as a group. Now, that can indeed happen and is the driving force behind many an attack on a conglomerate and varied demerger attempts. But this does then run into that corporate structure of the REIT.
The value of the properties separately is only going to be greater if there are either diseconomies of scale or value substractions that happens as a result of it being a group. But in a REIT format that's very rarely true. Given that 90% of income is paid out there's little to no cross-subsidisation of less profitable activities within the company. This would at least indicate that unwrapping the REIT isn't a great value generator. For those buying individual properties will be willing to pay based upon the same income flows that the REIT itself is valued upon.
The time this changes is if investors think that the Seritage management is so incompetent that they are value detracting. Could be true of course but it's unlikely.
50% and change might be too much of a rise in Seritage stock given the REIT nature of the corporation.