tiddman

Just looking at the list in the 10-K I see 20 props 100% leased, 8 at 90-99% and 11 at 80-89%. Rental revenues are around $31M/quarter. What you found is consistent with what I was thinking. BRK is in a first lien position and is secured by the assets and has to approve sales etc. It's one big term loan which is not ideal but the rate isn't too bad and should have given them enough capital to get over the hump but not quite. And I agree with your overall assessment. They've mostly completed about 40% of their redevelopment, the rest is in various stages and some has not been started. The carrying costs of this are low but the development requires capital. The completed properties seem to be doing fine and represent a 10%+ unlevered ROE and there is probably decent equity there. But they're stuck in the middle, not enough properties developed to produce substantial cash flow or refinance their debt and not enough funding to complete the rest. So they're going to need another round of funding of some sort. The $400m of incremental financing from BRK would have helped but they could not get that in part because of the timing of the pandemic. It is not in BRK's interest to play hard ball and prevent them from monetizing any assets or raising capital but they want their loan to be secure. They won't let any lender in front of them so the company has to find 2nd lien or equity financing. Lampert theoretically has the capital but somehow he always does 10 things that don't make sense for every thing he does that makes sense. Something like a $500-1000M line of credit or equity financing would probably be all it takes to get them over the hump.

Trying to see where you are getting that from. You can see the properties listed and the 35-40 properties that have occupancy 80-100% and so are probably pretty stabilized. Are you saying that they have not refinanced any of them? My assumption has been that the terms of the Berkshire financing are that it is secured by the properties and it is a term loan so they can't refinance properties and use the proceeds to pay down some of the debt; it isn't a revolver or line of credit. A line would probably be more flexible and advantageous to SRG but that isn't what they have. I am also not sure the extent to which Buffett has been or needs to be personally involved in what is a very small investment for Berkshire. If things at SRG went south, the loan is secured by the assets and so Berkshire could theoretically foreclose. I doubt they have any interest in getting involved in real estate operations so most likely would either give some concessions on the loan in exchange for greater collateral or probably package and sell the company and the assets (my speculation). This is the kind of thing that I'd expect Abel to handle or delegate post-Buffett.

The bear theses I have heard do not seem to understand the value creation or development pipeline. They usually pick "B" mall REIT comps like CBL and PREIT, which are already struggling, and show that SRG's metrics/ratios/profitability are even worse than those, and conclude that SRG is headed out of business. This is often on the backdrop of assumptions that "retail is dead", "malls are dead" and "the Amazon effect". But as I noted I don't think these companies are comps at all, and I personally don't think retail is dead either. To say that the costs of undeveloped space will outpace value creation only makes sense if the development either stops or is not successful since the see saw has been tipping for years. But I think it's not really debatable that they have executed their developments very well and have found good markets for JV's, leasing and selling and they have basically severed their ties with Sears. I am not an ardent SRG bull necessarily but I have not heard a coherent bear thesis. The two main risks are in the execution of the development pipeline and that they either run out of funding or the cost of funding becomes so high that it is uneconomic to shareholders for example if they have to borrow at 12-15% or if they have to heavily dilute the common. I have not seen either of these things yet though as I noted I do think they are going to have to raise more funding at some point relatively soon. The pandemic came at a really bad time for them because they were near an inflection point, and it disrupted not only their rent collections but their development pipeline. 2020 was pretty much a disaster but they appear to be intact currently and the economic environment for the next few years is very much in their favor.

Imagine if Berkshire listed a tracking stock for certain subsidiaries such as GEICO and BHE. Rather than just own Berkshire and the consolidated results you could own a larger portion of certain subsidiaries in whatever proportions you wanted. And you can then invest directly in the fastest growing subsidiaries while the parent company still also gets benefit from them. This is essentially what Brookfield has done. This is a much better outcome for shareholders. Trisura's market cap is still only $1.3 billion after the run-up, Brookfield's is about $75 billion. If they owned 100% of Trisura, those gains would not have "moved the needle". But by spinning it off shareholders get the benefit directly.

Borrowing money based on operating cash flows / profits is one way to go. However the ~$2B line that SRG got from Berkshire was not based on cash flows rather it was secured basically by the assets, it is development financing. This is why it carried a coupon of 7% rather than something like 3-4% which would have been typical for a mortgage. Development and construction financing comes in many forms and in the grand scheme of things 7% is not very hard money. There was also the preferred stock funded by Eddie also at 7% which was not based on any particular operating results. Whether or not this is economically viable depends on the economics of the developed properties. But borrowing money at 7% to develop a property to increase its rent by 4x is a no brainer. Average property size about 140k sf. Average redevelopment per property about $16M or $114/sf. Average finished rent currently $18-20/sf. Pretty clear 10%+ ROI for all new capital. And once the property is completed it can either be refinanced with a mortgage at a lower rate or sold and the proceeds recycled into a new project. Assuming that they can successfully develop and let the properties (big assumption) honestly I don't really see what the problem is.

Not sure I totally follow... cash flow is obviously the ultimate goal but developing properties can be funded by many sources whether it be issuing equity i.e. preferred stock, debt, or internally generated cash from either NOI or asset sales. SRG has used all of these things. I don't think there is any requirement that the company be self-funding from an operating cash flow perspective, and no development stage or startup company is. SRG will likely need one more chunk of some kind of funding to get over the hump, getting their square footage 60-70% developed. Doesn't look like they'll get the performance-based bump financing from Berkshire and they probably can't issue common or preferred at these prices. They are doing a pretty good job of asset sales but not sure they can sell enough to fund everything. And they don't want to sell their best properties so that they end up funding and developing the lesser properties. This I think is the challenge they face.

Yep I have been watching helplessly as the stock took off like a rocket ship with me left behind. I feel pretty certain that Brookfield only creates or spins a company if they have a pretty firm 3-5 year plan for it, and some particular market segment or something that they are going after. When Trisura was spun I read everything about it and that segment of the insurance industry and what I could determine as their peers and just never really got a bead on anything in particular. And here we are 6x higher than when we started. I am not big on "faith based investing" but I suppose I should have just taken a position based on faith... I am not saying the same thing is going to happen with BAMR but they obviously have a plan in store. Oaktree brought credit capabilities that Brookfield did not previously have which lend themselves to insurance float. And we see how this can take shape with AEL. I think that BAM using their own balance sheet to start a reinsurance business is highly unusual and will surely only be a temporary arrangement until they can capitalize the company separately. They must see an opportunity here. I doubt that they want to engage in the actual reinsurance business and am guessing they will lay the risks off to reinsurers somehow, and instead focus on investing the float. I really doubt that BAM wants to put their balance sheet in the way of natural disasters for example. Will be interesting to see how it plays out.

I hate to open the deep, wide, gaping maw of a rabbit hole that is Sears, but there has been a theory going around that the Sears long term plan was to spin off all of its assets including Seritage, go through bankruptcy, emerge on the other side, and then buy back any assets that were valuable and hold them under a NOL umbrella. I personally am skeptical of this idea, but Eddie selling his stake in SRG may support this. He would probably not be allowed to enact such a merger if he controlled both companies so maybe he is selling his stake in SRG so he can acquire it with the shell that is Sears?

Tried to reply once and my message got eaten, will try again. To me the difference is the level of development. I'm more familiar with SRG than MAC but my understanding is that MAC is primarily a holder of completed/established mall properties. They have some development of around 600k square feet I think in one project. SRG on the other hand has completed somewhere around 40-45% of its square footage, the remainder encompasses millions of square feet of space in 15-20 projects that is in various stages of development, anywhere from idle to ground broken to under construction to completed, on the market, or newly leased. It's a giant redevelopment project that is around half way done. This simple fact often seems to be lost when people try to find comps to SRG. They compare SRG, a development-stage company, to a REIT like MAC or CBT, and draw conclusions. But this is like comparing two houses, one of which is 95% done and rented and they're working on the porch, to another that is 50% built missing its windows, roof and kitchen. It's completely apples and oranges. If you compare SRG with half of its square footage undeveloped with another company that is 95% of its space developed it's not going to look very good. With SRG it's all about how much capital they will need to complete development, where that capital will come from at what cost, the economics of the completed properties and how soon they can get them done, and execution risks along the way. With established REIT's is a different story about cash flows, leverage, occupancy, A vs. B properties, etc.

I am not sure I get all of the details but it will be a tracking stock that tracks assets that are on BAM's balance sheet so initially will be equivalent economically, but not convertible. Like you can have multiple stocks in multiple markets that all track the same company, yet they trade independently and are not convertible into one another. I assume over time this will diverge as the company is capitalized and created and further spun.

BAM shareholders will only get a tiny amount, 1 share per 145 held so this is like a 0.7% dividend. So if you really want to own more you'd have to buy more after the spin. Initially it is economically equivalent to BAM so just like buying BAM. With luck the unit price will tank at some point to give us an opportunity to buy as happened with BIP and BBU. I took a real hard look at Trisura when it was spun and just couldn't figure out what was special about it or what is prospects were. Now it is up 6x from the spin price. I am sure that Brookfield had a strategy for it and a market segment they wanted to take and have apparently done so, but I just couldn't predict it by looking at the post-spin Trisura. Not saying the same thing will happen here but Brookfield surely has a multi-year strategy in store for BAMR. The structure of the spin is different with this tracking stock which initially is economically equivalent to BAM. I assume that will change over time as they get capital into the reinsurance sub and it will eventually sprout its own wings.

I have never paid such close attention to the week by week workings of the Supreme Court. So it seems likely that there will be a decision sometime in the next couple of weeks, before their summer recess?

I do find it bewildering sometimes that the same assets can be owned, sliced, sold, financed, shared, bear fees and distributions in so many different ways but still basically remain the same assets. I also feel sure that the darker side of this deal is that they either were not going to be able to keep the BPY distribution uninterrupted or wanted to invest in / dispose of the assets in ways that do not provide the steady, consistent returns that an income investor would expect. The retail side of the portfolio is probably going to be a 3-5 year work-out project which may ultimately be fruitful but would probably be painful to watch as an income investor. If they had cut the distribution at BPY the unit price would have fallen even further and may have taken years to recover and their interest is in being able to hold the assets somewhere at close to full value. From this perspective, keeping them in a publicly traded yield vehicle doesn't actually make sense so provides more justification for the deal. The only reason to keep BPY public is to allow it to tap the capital markets, but that is difficult when it is trading at a perpetual discount to NAV. So may as well be private. BPY (and previous property incarnations BPO etc) has always been a source of cash for BAM, not only NOI but they take all of the equity out of the properties through financings and dispositions and upstream that all to BAM, and most of the capital they use for development is borrowed. This has always made a lot more sense for BAM than BPY which ends up looking like a highly leveraged shell. So I guess may as well be private. However all of that said I am still struck by the go-private. Brookfield Properties has been a core part of Brookfield and Brascan going back to the 1970's and 1980's. It sounds like they are basically putting it out to pasture and reducing their overall exposure to real estate in favor of the other asset categories, which as a BAM shareholder I'm a fan of because the infrastructure and renewable power especially have a very bright future.

I have been trying to wrap my head around BPY going private and the recent comments in the BAM shareholder letter and call. From the letter: And then in the quarterly call: This caught my attention. Taking BPY private means essentially moving BPY's assets onto their own balance sheet. But it sounds like they will then sell these assets and reduce their exposure to real estate. BAM currently collects both distributions and fees from BPY. The distributions are essentially a percentage of BPY's free cash flow, a significant amount of which are provided by refinancings and dispositions. The fees are the GP management fees. They are obviously interested in keeping the same level of income coming in after the privatization and after they sell any assets. So they must have private fee-bearing funds lined up, which must have return goals low enough that they can pay full price or close to it for these assets. So they will go from collecting fees on an asset carried at 60-70% of fair value to fees collected at fair value. It isn't clear to me how BAM will replace the distribution income if they no longer own the assets. Maybe it will be essentially front-loaded as disposition gains. They also have a robust development pipeline on both the commercial and residential assets. I guess these private funds provide a captive buyer of the completed assets and they can invest, complete and sell them at a pace that they probably have a lot of control over. At the time of the deal I thought that Brookfield was playing the spread between public and private valuation and that this would flip at some point in the future, like they go private at 2/3 of fair value and plan on spinning the assets back out when the cycle turns at > 100% of fair value. But now instead I wonder if this is about Brookfield really rotating out of real estate assets, essentially a slow-motion liquidation of most of their real estate. There was a time when most of their assets were real estate and infrastructure and renewable energy were just getting started. I wonder if now the worm has turned and there are better growth opportunities in those assets and the real estate will be sold to fund them?

The deal has to be approved by a "majority of minority" holders, essentially their own vote doesn't count. That minority is probably concentrated in a few holders that they are already affiliated with but at least there will be a vote.