Upon its creation in June 2015, Seritage absorbed a portfolio of 235 properties from Sears Holdings, consisting of approximately 36.7 million square feet of building space diversified across 49 states and Puerto Rico.
As Sears has trudged toward going out of business, Seritage shareholders have enjoyed a nearly 15% return year to date. Many shareholders are expecting more of the same dichotomous return as Sears potentially liquidates and opens up Seritage properties to "superior terms" agreements with high-rent clientele like Equinox.
Not so fast, according to legal and investment experts.
"Seritage will have to temper expectations to the reality of the current retail environment," David D. Tawil, president of distressed debt focused hedge fund Maglan Capital, told Real Money. "The market is still digesting the largest retail bankruptcy by number of locations in history in Toys R' Us."
He explained that given the large number of retail spaces available from that bankruptcy, coupled with the possibility that other troubled retailers could go under, would provide for a glut of available commercial real estate. As such, it would become difficult to squeeze too much rent from tenants.
Legal experts also noted that Sears is likely to continue to pay its preferred pricing on rent even if bankruptcy and liquidation take effect.
"All current obligations freeze in bankruptcy, all ongoing business costs remain," Brian C. Kochisarli, a lawyer at Davidoff, Hutcher, and Citron told Real Money.
Sears remaining as a discounted tenant would create a delay in renting out these potentially profitable properties, also delaying payout to Seritage shareholders.
He added that there could be an additional drag on the transition as Sears shareholders challenge spinoffs made by CEO Eddie Lampert on his way to bankruptcy, Seritage being a notable example.
"The situation is somewhat tenuous because some of Lampert's transactions will be contested," Kochisarli explained. "The shareholders will try to claw something back."
To be sure, he explained that the case might be difficult to make given that shareholders would need to prove "fraudulent conveyance," or simply that Lampert spun off properties in order to avoid debtors.
"If they can prove that, they might be able to claw something back," he said.
So, while Seritage may have liquidity and properties, there is still room to be cautious on the company's opportunity stemming from Sears' serious problems.
Seritage shares dropped 5.9% to $45 on Wednesday, indicating the market may be wary of these risks.