By Soma Biswas and Allison Prang 

Seritage Growth Properties, the property company Edward Lampert carved out of Sears Holdings Corp. three years ago, tried to reassure investors on Monday that it still has a bright future even though Sears, its biggest tenant, has filed for bankruptcy.

Seritage sought to persuade investors that it has a sufficient cash cushion to weather any rent shortfall from Sears. On Monday, the real-estate investment trust (REIT) told shareholders that $1 billion of cash on hand and the loan it took of up to $2 billion from Berkshire Hathaway Inc. in August should "cover any cash flow shortfall we may incur in the near term were Sears Holdings to stop paying rent."

In 2015, as a way to raise $2.7 billion in cash, Sears spun off 234 stores and its 50% interest in three joint ventures for 28 other stores into a newly listed company: Seritage.

The plan was to gradually re-rent Sears stores to new, higher-paying tenants.

Last week Seritage shares declined nearly 15% after The Wall Street Journal first reported last Tuesday that a Sears bankruptcy filing was imminent. The stock recouped some of those losses Monday, gaining 3.3%.

On Monday Sears said it plans to close 142 money-losing stores before year's end, and question marks hang over the fate of additional unprofitable stores. Of 687 Sears stores, 400 are profitable, the company said in court filings.

Mr. Lampert, who controls Sears Holdings through his hedge fund ESL Investments, owns 36% of Seritage shares.

Seritage has been able to find tenants at almost all of the 74 stores Sears closed after Seritage was created in 2015, but most are only partially rented, with about two-thirds of the space still vacant, according to a letter Seritage sent to shareholders Monday. At the same time, Seritage is earning nearly the same amount of rent on those partially rented stores as it did when Sears was the tenant, the company also said.

"The quality of real estate for many of these Sears is really exceptional," said Stenn Parton, chief retail officer at DJM Capital Management, a real estate developer.

"But taking a space that big -- hundred thousand to two-hundred-and-eighty thousand square feet of space, it's tough to find a retail tenant today that can backfill that space," Mr. Parton noted.

In the long run, a Sears bankruptcy is a good thing for Seritage because if Sears closes more Seritage-owned stores, the REIT can lease the space to tenants paying far higher rents, said a top Seritage shareholder who is not authorized to speak to the press.

In the near term, though, rental income at Seritage could take a hit as Sears closes some or all of its stores, the shareholder also said.

While Sears had been closing stores steadily even before it filed for bankruptcy on Monday, chapter 11 of the U.S. bankruptcy code gives it the ability to reject leases and stop paying rent on stores it intends to shutter, rather than having to wait for leases to expire.

Sears accounted for 63% of Seritage's rental income at the end of the second quarter, according to a report last week by RBC Capital Markets analyst Wes Golladay. The RBC report noted that the worst outcome for Seritage would be a Sears liquidation.

On Monday, Seritage touted a different statistic. The company noted that 70% of its income would come from tenants other than Sears if a number of vacant stores that have already signed up new tenants but earn no rent today were counted. Seritage expects those leased but unoccupied spaces to be filled over the next 24 months, the company said in the shareholder letter.

As of the end of September, Sears was a tenant in 102 of Seritage's 248 properties, and in another 22 properties Seritage partially owns through joint ventures, according to securities filings.

About half of the 144 wholly owned Seritage properties that are rented to Sears share the space with other tenants, the filings also show.

Seritage has a significant amount of empty space, however, as Sears has closed stores rapidly, and many of those stores have yet to find new tenants or be occupied by ones who have signed leases.

Seritage has been able to find new tenants that are paying three to four times the rent that Sears was paying, the company said in its letter to shareholders Monday.

A spokesman for Seritage declined to comment beyond the company's statement and its letter to shareholders.

Write to Soma Biswas at soma.biswas@wsj.com and Allison Prang at allison.prang@wsj.com

 

(END) Dow Jones Newswires

October 15, 2018 17:53 ET (21:53 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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