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SRG - Seritage Growth Properties


accutronman

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If the majority of SRG's value will be realized via renting existing and redeveloped/newly developed space, then I think incremental rents and the related return on capex are what will help us determine the intrinsic value of the company.  Another important factor we must try to predict is the amount of capital they can invest on new and re-developments every year and in total over the next 10+ years with this portfolio. 

 

On the other hand, if you believe SRG will begin to sell off significant portions of land, then market value and it's approximate relation to book value are of importance.  Returns on capex do not matter if we are liquidating the portfolio.  In the current state I don't think SRG plans to liquidate it's land portfolio and therefore book value is not of utmost importance.

 

Once you extrapolate how much capex will be necessary to redevelop the entire portfolio then you'll see why they will have to sell off a substantial portion of their properties (whether via whole property sales or through JVs/partial sales).  They're not liquidating but they are going to need a ton of cash for redevelopment.  The contemplated Dallas office towers alone have an $800MM price tag.  Total portfolio cash needs is easily in excess of $2B.

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Do you think they will have an opportunity to access capital via mortgage debt?  I would imagine that the income and related value from their 68 redevelopments (as shown on page 4 of the IR presentation - link below) would support more mortgage debt than the $1.3 Billion SRG currently has.  They estimate these 68 redevelopments to be worth over $3 billion.  I would think they could take out another $700 million to make their debt load $2 Billion.  This way they can access capital as they progress and keep all real estate.

 

 

http://ir.seritage.com/Cache/1001237538.PDF?O=PDF&T=&Y=&D=&FID=1001237538&iid=4584761

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BTShine - off memory, this is not possible under the current arrangement.  Obviously they would like to change this.

 

Good point.  I oversimplified the process.  They would either need to renegotiate their current mortgage and increase it's size.  Or they could obtain a new mortgage and pay off the exiting one.  There was a prepayment penalty, but that is not in place anymore as of March 9, 2018.

 

 

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The incremental returns on capex for redevelopment are most important for me.  Also, if investing this capex not only increases lease rates per square foot, but also locks in existing rents with a higher quality and more diversified tenant base, that also creates value. 

 

I’m less concerned with absolute lease rates and more concerned with how much capital SRG must invest for the related rent increases.

 

I agree but you also have to consider how much of this is priced in?  It's not like SRG is trading at book value.

 

Why do book value matter when dealing with real estate companies?  Whether you bought the properties 10, 20, 50, 100 years ago make a huge difference on how book value relates to current market value. 

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Wow, amazing indeed:

On July 31, 2018, Seritage Growth Properties, L.P., a Delaware limited partnership (the “Borrower”), as borrower, and Seritage Growth Properties, a Maryland real estate investment trust (the “Company”), as guarantor, entered into a Senior Secured Term Loan Agreement (the “Loan Agreement”) providing for a $2.0 billion term loan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire Hathaway”) as lender and Berkshire Hathaway as administrative agent. The Term Loan Facility provides for an initial funding of $1.6 billion at closing (the “Initial Funding”) and includes a committed $400 million incremental funding facility (the “Incremental Funding Facility”).

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Sears is going under sooner than later. This covers the $1 billion in estimated funding shortfall if Sears goes under, and they got it done before the distressed scenario, at decent rates. Equity would have been dilutive, debt can be paid off over time and accrective. Essentially, this removes a big downside risk, or at least mitigates it significantly. They still have to execute and its still essential to monitor sears' health.

 

But dang, what a move.   

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This is interesting as it certainly clears up some uncertainty around SRG. But a few questions:

 

- why debt and not equity? Too small for BRK to own equity?

- Buffett has to disclose this right?

- does this make it more or less likely Buffett still owns in his PA?

 

What do you imagine would happen if Seritage went under and Berkshire owned the equity or debt?  This way, Berkshire gets a good rate on the loan, and a small possibility it ends up as one of the largest creditors in a bankruptcy.  Buffett knows those properties are worth three times what they are carried for.  Chances are slim that anything goes wrong with Seritage, but just in case...Cheers!

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On another note, Bruce Berkowitz sold all three funds out of SRG.

 

http://www.fairholmefundsinc.com/Reports/Funds2018SemiAnnual.pdf

 

The Fund exited its position in Seritage Growth Properties as we became concerned that the cash flows from developed properties no longer covered a below-industry average dividend in a raising rate environment.

 

An incredibly weak reasoning for exit.

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I am surprised no one has brought up the strange situation here with Buffett.  Isn't it a bit weird to have BRK fund SRG while he personally owns the equity?

 

I am all for strategies where you make your own luck, buy equity and then help provide stable funding.  But when the ownership is personal, but funding is from company...  Perhaps I am wrong, but seems like very close to the line for someone like Buffett.

 

Interested to hear if people disagree and why.

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I am surprised no one has brought up the strange situation here with Buffett.  Isn't it a bit weird to have BRK fund SRG while he personally owns the equity?

 

I am all for strategies where you make your own luck, buy equity and then help provide stable funding.  But when the ownership is personal, but funding is from company...  Perhaps I am wrong, but seems like very close to the line for someone like Buffett.

 

Interested to hear if people disagree and why.

 

I'm not sure how this scenario would be that different than what David Sokol was doing at Berkshire before Buffett parted ways under the guise that this was unethical behavior with Lubrizol.  That being said, it's probably best to wait for any comment from Buffett regarding the investment before jumping to any conclusions.  This may be capital that the double T's (Todd and Ted) are managing and the decision is independent...again, not sure how this would be any different than the Lubrizol issue.  I'm sure Buffett will comment shortly.  Cheers!

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I'm not sure how this scenario would be that different than what David Sokol was doing at Berkshire before Buffett parted ways under the guise that this was unethical behavior with Lubrizol.

 

I think the key factor working against Sokol was that he played his conflict a bit too close to the vest a little too long for everybody's comfort.

 

Buffett's position in Seritage was disclosed years ago and is pretty much known by 100% of the people on this planet who know what"Seritage" and "Warren Buffett" are. Something being done in broad daylight like this, with almost maximum transparency doesn't trigger any concerns for me.

 

I'm sure that won't stop Sokol from stomping around about it though.

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I'm not sure how this scenario would be that different than what David Sokol was doing at Berkshire before Buffett parted ways under the guise that this was unethical behavior with Lubrizol.

 

I think the key factor working against Sokol was that he played his conflict a bit too close to the vest a little too long for everybody's comfort.

 

Buffett's position in Seritage was disclosed years ago and is pretty much known by 100% of the people on this planet who know what"Seritage" and "Warren Buffett" are. Something being done in broad daylight like this, with almost maximum transparency doesn't trigger any concerns for me.

 

I'm sure that won't stop Sokol from stomping around about it though.

 

I run a small holding company and an investment fund...I can tell you with 100% certainty that I would not invest in debt or equity in something personally, and then finance it through the holding company or fund, unless they already held such debt or equity and were benefiting equally to me. 

 

Buffett's my hero, so I'm giving him the benefit of the doubt on this, but if this is the scenario of what occurred...then it is a bit close to that line.  I have not seen any EDGAR filing saying Buffett disposed of Seritage shares, nor have I seen any EDGAR filings indicating Berkshire has bought Seritage shares.  Let's see how they explain it at some point.  Cheers!

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I am surprised no one has brought up the strange situation here with Buffett.  Isn't it a bit weird to have BRK fund SRG while he personally owns the equity?

 

I am all for strategies where you make your own luck, buy equity and then help provide stable funding.  But when the ownership is personal, but funding is from company...  Perhaps I am wrong, but seems like very close to the line for someone like Buffett.

 

Interested to hear if people disagree and why.

 

I'm not sure how this scenario would be that different than what David Sokol was doing at Berkshire before Buffett parted ways under the guise that this was unethical behavior with Lubrizol.  That being said, it's probably best to wait for any comment from Buffett regarding the investment before jumping to any conclusions.  This may be capital that the double T's (Todd and Ted) are managing and the decision is independent...again, not sure how this would be any different than the Lubrizol issue.  I'm sure Buffett will comment shortly.  Cheers!

 

The issue with Sokol was that he didn’t disclose his personal holding in Lubrizol when he proposed BRK to buy the company. With WEB, the position is disclosed and was purchased years ag and one could also argue that the gain from WEB personal holding in SRG is virtually immaterialfor him anyways. I am fairly sure they have considered the optics of this related party transaction and made sure, it is beneficial for BRK as well, based on the loan terms. With a 7% interest rate for a 5 year loan term, they look pretty reasonable for BRK to me.

 

I am also curious on the disclosure of this transaction.

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On another note, Bruce Berkowitz sold all three funds out of SRG.

 

http://www.fairholmefundsinc.com/Reports/Funds2018SemiAnnual.pdf

 

The Fund exited its position in Seritage Growth Properties as we became concerned that the cash flows from developed properties no longer covered a below-industry average dividend in a raising rate environment.

 

Meanwhile he continues to hold the investing equivalent of quicksand in St. Joe as 1/3 of his fund... I generally give managers more leeway than most, but Bruce IMO, has lost it and is letting issues at his fund dictate his investment decisions.

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