• Research

Mar 30, 2017

S3 BLACKLIGHT: Seritage Growth Properties – A Sears Short Sale Alternative

With borrow liquidity all but exhausted on Sears Holding Corp (SHLD US), and with financing fees hitting the triple digit mark this week amid volatile trading activity, one might look at Seritage Growth Properties (SRG US) as an alternative short play to indirectly gain exposure to Sears’ demise, without the potential massive short squeeze risk.

Seritage was created back in 2015 as a REIT (real estate investment trust) when Sears sold 266 of its properties to newly-formed SRG for $2.7 billion.  SRG’s largest tenant is SHLD, which still represents a majority of its rental income.  Its largest holder, Fairholme Capital Mgmt, is also the second largest holder of Sears, only behind Eddie Lampert.  With both increasing their stakes recently in Sears, lowering the overall float of the company, hedge funds are facing re-rates and recalls from their prime brokers as the remaining beneficial owners sell their long exposure. 

SRG short interest is currently at an all-time high at the moment, with our real-time projections showing $368.5 million in short exposure, and as much as 8.65 million shares currently on loan.   This would equate to as much as 35% of the float of the company being borrowed, with 40% not far out of reach with how it’s trending.  This compares to an average short interest of $80.7 million and $203.1 million in 2015 and 2016, respectively.   Financing rates right now are trading hands between 9-10% fee per annum - not the cheapest but certainly a lot more affordable than SHLD.     

With short interest in SRG continuing to rise, there may not be too much time to initiate a bearish bet as borrow liquidity tightens due to the increased demand from bearish speculators.  

Want deeper insight into the above analysis? Contact: 
Matthew.Unterman@s3partners.net
Director, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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