SRG - Seritage Growth Properties

[gfp]

Seritage equity is way too small to be considered for investment by Berkshire.  The terms of Berkshire's loan are not particularly beneficial for SRG, it's not like a gift or something.  SRG could have borrowed from anybody, and possibly at lower rates.  It's a good deal for Berkshire capital.  The equity wan't an option for BRK, which is why Buffett probably considered it in-bounds for a personal investment years ago.  Doesn't seem that conflicted to me, since its not like he 'saved' SRG equity or something.  They have a bunch of real estate to borrow against.  Refinancing the loan was never really a question right?

 

I have a much bigger issue with Warren buying JPM personally and skipping it for Berkshire, when he could have purchased it in size.  But it's super easy to monday morning quarterback investment decisions after the fact.  At the time, he thought WFC was his favorite.

[HalfMeasure]

Seritage equity is way too small to be considered for investment by Berkshire.  The terms of Berkshire's loan are not particularly beneficial for SRG, it's not like a gift or something.  SRG could have borrowed from anybody, and possibly at lower rates.  It's a good deal for Berkshire capital.  The equity wan't an option for BRK, which is why Buffett probably considered it in-bounds for a personal investment years ago.  Doesn't seem that conflicted to me, since its not like he 'saved' SRG equity or something.  They have a bunch of real estate to borrow against.  Refinancing the loan was never really a question right?

 

I have a much bigger issue with Warren buying JPM personally and skipping it for Berkshire, when he could have purchased it in size.  But it's super easy to monday morning quarterback investment decisions after the fact.  At the time, he thought WFC was his favorite.

 

I agree with your sentiment. For Berkshire, the debt makes a lot of sense since they're essentially moving $2bln yielding ~2% in treasuries to a 5 year piece of paper @ 7% that's well over-collateralized. As you mention, 7% isn't cheap and SRG might have even paid a higher rate to Berkshire for the halo effect which benefits the equity on a short-run mark-to-market basis but in terms of the terminal value doesn't change much. If BRK lent @ a below market rate that might be a different story.

[koshigoe]

the issue with Sokol is that he bought his shares a month or two before the buyout. Buffett has held through ups and downs for nearly 3 years, much like Munger had with BYD before Berkshire came in as 10% owner. So BYD is the analogy, not Sokol and Lubrizol.

[BTShine]

Agree with you on this, Koshigoe.  Sokol recommended the investment without telling his boss about his recent purchases.  Buffett felt misled. 

 

As for the financing, it looks like a good rate to me.  With the 1% fee on unused funds of $400 million the blended rate is closer to 5.8% for the $2 Billion commitment.  They only get to the full 7% rate when shovels are in the ground that require the extra $400 million of funding. 

 

The shadow of Sears is gone from Seritage and now replaced with the halo of Berkshire.  A good day indeed. 

[gfp]

My impression is that it is 7% on $1.6 Billion plus 1% on the undrawn $400 million until drawn, at which point the additional $400 million is also 7% money.  So not cheaper than 7%.  More expensive than 7%.  At least they didn't have to give out a bunch of cheap warrants

[BTShine]

When will all the ‘analysts’ discover SRG is creating about $15 a share in value every year?

[Shane]

BTShine - How are you coming up with $15 per year?

[Parsad]

the issue with Sokol is that he bought his shares a month or two before the buyout. Buffett has held through ups and downs for nearly 3 years, much like Munger had with BYD before Berkshire came in as 10% owner. So BYD is the analogy, not Sokol and Lubrizol.

 

Buffett always had the ultimate say on the Lubrizol deal...if it was nixed, Sokol was left holding Lubrizol stock.  Sokol was not guaranteed that Lubrizol would be bought by Berkshire.

 

Buffett holds SRG directly in his personal account.  Whether he held those shares for 1 year or 10 years is irrelevant, as he holds the decision to fund the SRG term loan.  It's not about disclosure, it's about the stock moving likely upwards as financing risk is removed.  If the SRG stock had been held by Berkshire, then that's perfectly fine. 

 

It's pretty clear as the nose on your face that this deal actually holds more conflict than the Sokol/Lubrizol deal.  I expect there is something that has not been disclosed, because I think the conflict here would be very discernable to Buffett and Munger.

 

Someone commented on the JPM investment, but that is less relevant, because Berkshire may already have held too much in bank-related stocks with their large positions in WFC and BAC.  We know Buffett buys small amounts of many stocks, simply to receive the annual reports, and that he was a big fan of Dimon's.  JPM's stock movement was not predicated on any influence by Berkshire, so while it may have annoyed shareholders that he didn't buy any JPM for Berkshire, it also isn't really a conflict.

 

Cheers! 

 

 

[JRH]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

[Parsad]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

 

Buffett still made the ultimate decision to either approve or nix the deal.  Sokol could have been left with a boatload of stock. 

 

Yes, the probability was better that Berkshire might buy Lubrizol with Sokol pitching the idea, but would anyone say that Buffett would approve a deal without doing all of his own analysis?

 

If Sokol was terminated because he didn't disclose all of his holdings in Lubrizol and it breached the company's bylaws and investment policy...that's fine.  They were justified in terminating him. 

 

But if we are talking about beneficial interest and that interest increasing because of a financing investment by Berkshire, I think that is an obvious conflict with SRG and the term loan.  Again, I expect an explanation, because that does not seem like Buffett's normal modus operandi.  Cheers!

[Grenville]

Not sure if this improves the optics but one thought I had.

 

What if Sharon Osberg came up with the idea for Berkshire to provide the loan to SRG, without any indication or encouragement from Buffett. Once Buffett was told of the idea, he asked the independent board members of BRK to approve or disapprove the loan.

 

Warren probably did the underwriting which probably would make it a little suspect unless he had Ted or Todd look into it. Still it's odd for Berkshire to get involved in a small $2bln loan or take up either Ted or Todd's time without much material upside from the investment. I would have guessed they would have gotten some equity through the Berkshire seal of approval.

 

Granted Warren is close with Sharon and she knows he owns a stake in SRG. She also wouldn't be on the board of SRG had it not been for Warren investment.

 

 

[Saluki]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

 

But if we are talking about beneficial interest and that interest increasing because of a financing investment by Berkshire, I think that is an obvious conflict with SRG and the term loan.  Again, I expect an explanation, because that does not seem like Buffett's normal modus operandi.  Cheers!

 

BRK has $100+ Billion in cash and cash equivalents earning very little. They now took $2 billion and lent it, secured by real estate.  SRG, when Buffett bought the stock was about a $2 billion enterprise value company.  If BRK bought a 5% stake in the common it would be $100 million, so 1/10th of 1% of BRK's available cash.  BRK couldn't buy the common because it's too small to move the needle. Buffett could do it in his personal account, just like he could buy the Korean stocks selling at a 3x PE because they were also something that wasn't right for BRK based on size. Lending SRG money, secured by a lot of real estate is a different story.  This is similar to the $2 billion that they lent Home Capital.  I see no conflict here at all.

 

Besides, if he owns a third of BRK, then ~$630 million of the share of the money was "his", so are you we to believe that he risked $600+ million of his own money so he wouldn't lose money on the original $72 million investment?

[Parsad]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

 

But if we are talking about beneficial interest and that interest increasing because of a financing investment by Berkshire, I think that is an obvious conflict with SRG and the term loan.  Again, I expect an explanation, because that does not seem like Buffett's normal modus operandi.  Cheers!

 

 

Besides, if he owns a third of BRK, then ~$630 million of the share of the money was "his", so are you we to believe that he risked $600+ million of his own money so he wouldn't lose money on the original $72 million investment?

 

Even if you reverse that statement...that he put $72M from Berkshire into the loan and held $600M in SRG shares...is that a conflict?  So why would it not be if the numbers are reversed? 

 

The fact that Buffett doesn't own 100% of Berkshire...that he's the CEO, a fiduciary to the shareholders...means that there has to be a firewall in how he operates his personal accounts that he owns 100% of and how he operates a corporation that he owns 30% of.

 

I can't own stock in my friend's public or private company in my personal account, and then give him a loan through the company I'm running which would solidify the value of that underlying stock.  That's just common sense.  Yes, I could do that if the company I was running held the stock...but not personally.  And I would still be doing exactly the same as Buffett...risking more capital I own indirectly for a small equity position that I hold personally...that conflict hasn't disappeared, has it?

 

I am not a paragon of virtue, nor would I throw shade at Buffett...but we do run into the occasional hypocritical behavior or action by Buffett...which we should recognize as well as his genius and humanity.  Again, I await an explanation that makes more sense to me from Berkshire...at the moment, it doesn't pass the old smell test.   

 

Cheers! 

[Parsad]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

 

But if we are talking about beneficial interest and that interest increasing because of a financing investment by Berkshire, I think that is an obvious conflict with SRG and the term loan.  Again, I expect an explanation, because that does not seem like Buffett's normal modus operandi.  Cheers!

 

 

Besides, if he owns a third of BRK, then ~$630 million of the share of the money was "his", so are you we to believe that he risked $600+ million of his own money so he wouldn't lose money on the original $72 million investment?

 

Even if you reverse that statement...that he put $72M from Berkshire into the loan and held $600M in SRG shares...is that a conflict?  So why would it not be if the numbers are reversed? 

 

The fact that Buffett doesn't own 100% of Berkshire...that he's the CEO, a fiduciary to the shareholders...means that there has to be a firewall in how he operates his personal accounts that he owns 100% of and how he operates a corporation that he owns 30% of.

 

I can't own stock in my friend's public or private company in my personal account, and then give him a loan through the company I'm running which would solidify the value of that underlying stock.  That's just common sense.  Yes, I could do that if the company I was running held the stock...but not personally.  And I would still be doing exactly the same as Buffett...risking more capital I own indirectly for a small equity position that I hold personally...that conflict hasn't disappeared, has it?

 

I am not a paragon of virtue, nor would I throw shade at Buffett...but we do run into the occasional hypocritical behavior or action by Buffett...which we should recognize as well as his genius and humanity.  Again, I await an explanation that makes more sense to me from Berkshire...at the moment, it doesn't pass the old smell test.   

 

Cheers!

 

What I would like to see is that he either disposed of the SRG stock before the transaction or sold it to Berkshire or SRG at his original cost.  Either of those would live up to the ethical standards he's set.  Cheers!

[BTShine]

Shane - every $500m capex creates RE that will produce around $75m per year.  At a cap rate of 6% this property is worth $1,250. 

 

Subtract the original $500m they used and now you’ve $750 million in value creation.  About $15 per share.

[sleepydragon]

I don’t think there is any conflicts of interests. There is only a problem if Buffett is doing a trade in the opposite direction: I.e. he is selling while brk is buying, or buying when brk is selling, or he sell shortly after brk bought. Plus, He is getting a bond with a very nice 7% return so he is Not giving out favors to benefit SRG at the cost of Brk (and no incentive to do so cuz he still have more brk stocks than srg). Plus, he bought his stock long time ago, and only now Brk is offered a bond by SRG. He didn’t bought the stock knowing that brk will be offered the bond, nor did he proactively seek to help out SRG to have brk lend them money (I assume). The interest rate brk got is also very high.

 

[sleepydragon]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

In effect, Sokol bought knowing he will be selling to brk at higher price after Web make the offer. He is doing a trade in the opposite direction, at the cost of brk. In this case, who got hurt ? Nobody.

[Saluki]

I would note that the Seritage cumulative preferred shares trade at almost par and pay a 7.5% dividend.  Since it's a cumulative dividend, it's very similar to debt, but unsecured. Berkshire receiving debt, secured by real estate, that pays 7% and is higher up in priority in a bankruptcy to the common and preferred, seems like a fair price to pay.  I don't think BRK gave SRG a sweetheart deal because Buffett owns some of the common shares. If so, what would be a "fair" rate to pay?  If you believe BRK should never do business with a company where the CEO has invested, no matter how fair the terms are, that's a different argument and while I may not like the optics, I don't think there is something legally or morally wrong with it. I'm sure other people agree with you though, and I look forward to hearing the answer at the next Berkshire annual meeting. In the meantime, as a SRG holder I just wait like this  ;D

 

[cubsfan]

Yea, as a SRG shareholder - you got to love it.  7% rate seems a pretty stiff rate, SRG pays up, but the seal of approval is extremely valuable.

[RadMan24]

Current mortage and unsecured loans were 6.5% and due in 19 with 2 1 year options. New term isn't due till 23 and provides for sufficient funding to redevelop a ton of projects.

[Parsad]

I think the facts are incomplete here. Sokol held shares already, but he bought more after taking the idea to Buffett and their subsequent discussion of why the business would be a good fit for Berkshire.

In effect, Sokol bought knowing he will be selling to brk at higher price after Web make the offer. He is doing a trade in the opposite direction, at the cost of brk. In this case, who got hurt ? Nobody.

 

Conflicts of interest do not occur solely if a party is hurt.  The definition is "a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity."

 

If that is the definition most people use, then both Sokol and Buffett had a conflict in their positions...Sokol would benefit if Berkshire bought Lubrizol at a higher price...Buffett benefited as SRG's stock price increased 15% based on the news that SRG refinanced their loan through Berkshire subsidiaries.

 

How the hell does no one see this?  Cheers!

[Lakesider]

Usually you can get around conflicts by providing full disclosure, details of which have been disclosed.

 

Would Warren lend SRG money at 7% if he didn't have own equity? Probably, berkshire are in the insurance biz after all. WB bought the equity because he sees the value there, he bought the debt because he sees value there. The whole thesis is undervalued real estate, given that the liquidity issues are now sorted SRG is good for the credit.

 

 

[rb]

Sanjeev, I will have to respectfully disagree with you.

 

A lot has been said on this so I won't quote all of it to avoid clogging pages. But what Sokol did was essentially front running, and front running is bad. However his offense was not towards Berkshire shareholders. Sokol's offense was towards the Lubrizol shareholders whom he deprived of Berkshire's bid by buying their shares. The offense towards Berkshire shareholders was that he damaged the squeaky clean brand by engaging in front running that wasn't technically front running because of technicalities.

 

So obviously the SRG situation is different that the Lubrizol situation. I think the situation you've described in a previous post where you would use your investors money in the fund to help an investment you hold a personal stake in is a great example that applies to this situation. That is more of a typical agency problem. The thing is that when this sort of atrocity typically happens the agent has little financial stake but great control over an organization. Then uses said oprgaziation's resources to bail out a situation in which he has great net worth in.

 

In the case of Buffett and Berkshire, the situation is again different. Buffet's wealthis mainly in Berkshire. The SRG investment is a minuscule fraction of is worth. Completely different from the typical agency problem. Furthermore as others pointed out, SRG didn't get a sweetheart deal from BRK.

 

Let me put this another way. Let's assume that that JPM somehow goes into the ditch. Should Buffett and Berkshire pass on a BofA type deal with JPM just because Buffett owns the common in his PAs?

[Parsad]

A lot has been said on this so I won't quote all of it to avoid clogging pages. But what Sokol did was essentially front running, and front running is bad. However his offense was not towards Berkshire shareholders. Sokol's offense was towards the Lubrizol shareholders whom he deprived of Berkshire's bid by buying their shares.

 

If this is an offense to Lubrizol shareholders, then every activist manager out there who finds a buyer for a company they've invested in is doing the same thing.  Sokol was thoroughly investigated by the SEC and nothing happened.

 

In the case of Buffett and Berkshire, the situation is again different. Buffet's wealthis mainly in Berkshire. The SRG investment is a minuscule fraction of is worth.

 

Martha Stewart would agree with you, but the Justice Department thought differently.

 

Let me put this another way. Let's assume that that JPM somehow goes into the ditch. Should Buffett and Berkshire pass on a BofA type deal with JPM just because Buffett owns the common in his PAs?

 

Yes, until he's disposed of any shares of JPM he owns personally. 

 

Doesn't matter if it's $1 or $1B...conflict is conflict...it's not based on a dollar amount.  If you were golfing and bet someone big or small...the amount is a moot point if you aren't keeping score properly.  Cheers!

 

 

 

 

[rolling]

A lot has been said on this so I won't quote all of it to avoid clogging pages. But what Sokol did was essentially front running, and front running is bad. However his offense was not towards Berkshire shareholders. Sokol's offense was towards the Lubrizol shareholders whom he deprived of Berkshire's bid by buying their shares.

 

If this is an offense to Lubrizol shareholders, then every activist manager out there who finds a buyer for a company they've invested in is doing the same thing.  Sokol was thoroughly investigated by the SEC and nothing happened.

 

In the case of Buffett and Berkshire, the situation is again different. Buffet's wealthis mainly in Berkshire. The SRG investment is a minuscule fraction of is worth.

 

Martha Stewart would agree with you, but the Justice Department thought differently.

 

Let me put this another way. Let's assume that that JPM somehow goes into the ditch. Should Buffett and Berkshire pass on a BofA type deal with JPM just because Buffett owns the common in his PAs?

 

Yes, until he's disposed of any shares of JPM he owns personally. 

 

Doesn't matter if it's $1 or $1B...conflict is conflict...it's not based on a dollar amount.  If you were golfing and bet someone big or small...the amount is a moot point if you aren't keeping score properly.  Cheers!

We shouldn't be fundamentalists. Yes, there is a conflict of interest. Yes, it must be looked into with care. And, Yes, the first thing I thought was: "Doesn't he own the common?".

 

But the real questions are:

1- Is this a good deal for Berkshire? (it seems)

2- Did someone get hurt because of this (no, it wasn't the case with Lubrizol, where Sokol bought someone out after knowing it was likely to be taken out quickly... and yes, it is a big deal, I once sold a very big position on a huge 2 day rise, just to realize that the results that went out at the end of this rise meant I made a very bad deal, and those deals happened because somebody knew the results in advance... what Sokol did might not be technically abuse of priviledged information but it certainly feels like such; not the case with this Buffett deal)

3- Does this reinforce the idea that buffett acts in the best interest of shareholders? (yes)