What does the Sears bankruptcy mean for Seritage Growth Properties, the real estate investment trust that Eddie Lampert spun off Sears in 2015 in a bid to capitalize on the underlying real estate value of over 200 Sears properties?

Share prices have dipped over the past week as Seritage has been trying to calm investors. The REIT is telling shareholders that $1 billion in cash plus its August loan from Warren Buffett‘s Berkshire Hathaway for up to $2 billion would cover any shortfall in cash flow ? but rental income could certainly take a hit in the short term as Sears closes more stores, the Wall Street Journal reported this week.

Most of the 74 stores Sears closed after Seritage was created are partly vacant, according to a shareholder letter cited by the Journal.

At roughly 100,000-280,000 square feet, each of those stores has a lot of space to fill, Stenn Parton, chief retail officer at real estate developer DJM Capital Management, told the Journal.  “It’s tough to find a retail tenant today that can backfill that space,” he said.

On the flip side, Seritage has been rapidly working on diversifying its portfolio and moving higher-paying tenants into the space. One way it is doing that is turning the large spaces provided by Sears store into something else entirely.

In Aventura, Florida, that something else is an open-air shopping village anchored by the luxury mall where Sears used to be just one commercial tenants of Aventura Mall on Biscayne Boulevard in Aventura, Florida, a high-end mall owned by Simon Property Group and Turnberry Associates that also includes department stores such as Nordstrom and Bloomingdales, and luxury retailers like Gucci and Cartier.

Sears and Sears Auto Center at Aventura Mall used to be a place for Florida residents to get an oil change or pick up a toaster oven.

But in late 2019, those two stores, along with parking lots near the mall, are slated to house a 215,000-square-foot, three-story open-air retail, dining and entertainment complex with outdoor plazas and a pedestrian boulevard. (Two additional levels will be designated for parking.)

The retailers and restaurants will be a mix of American and international businesses, many of which will be new to the south Florida market, and the complex is meant to attract tourists as well as residents. The space is located in one of the most affluent markets in south Florida, a few miles from the beach and 15-20 miles south of Miami and Fort Lauderdale.

“If they can do something that creates that community feel where it becomes more of a community hub, there are a lot of people that will choose that over an enclosed mall,” Zach Winkler, senior vice president of retail brokerage at JLL, told the Miami Herald. “What makes something potentially a destination is that you go there because you can’t get it anywhere else.”

At the same time, six Sears stores in Florida are slated to close, in areas including Panama City, Melbourne, Lakeland and Ocala.

Part of the plan

Seritage’s switch to a more experiential, high-end retail vibe that isn’t centered around Sears is part of the plan, with other sites for premier developments including Santa Monica and San Diego, the REIT said in its 2017 annual report.

Seritage has also been aiming for accelerated tenant diversification, reporting that by the end of 2018 it expects 65% of its income to come from non-Sears properties, up from 20% when it was first launched in July 2015. At that time, just 11 of the 266 assets in its initial portfolio did not have Sears Holdings as the primary tenant. By year-end 2017, 111 assets in the portfolio no longer had Sears as the primary tenant.

And when Sears moves out, tenants providing higher rent income tend to move in.

Seritage said it is earning almost as much rental income on the partially rented stores as it was when the space was fully rented to Sears ? a trend that a leading Seritage shareholder said could ultimately make the Sears bankruptcy a good thing for Seritage, the Journal reported.

Whether Seritage was a good thing for Sears is another question entirely.

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