The Shopping Centre REIT That’s Got The Worlds Best Value Investors Very Interested.
North American Real Estate Investment Trust, Seritage Growth Properties (NYSE:SRG) is down roughly 68% from its 52 week high’s. To the unsuspecting eye, Seritage might seem like just another (REIT) that’s had its stock price beaten down by the coronavirus induced recession. But with SRG, there’s more to the story than meets the eye.
About Seritage Growth Properties.
Seritage is a REIT primarily engaged in the acquisition, ownership, development, redevelopment, management, and leasing of diversified retail and mixed-use properties throughout the United States.
Seritage was formed in 2015 after it was spun off from the recently bankrupt Sears Holdings (Kmart and Sears parent). Nowadays, Seritage owns Sears old property portfolio consisting of interests in 199 properties.
Seritages strategy to date has been to unlock the underlying value of their real estate by replacing the leases formerly occupied by legacy Sears and Kmart stores with new, higher paying tenants.
Because a lot of the real estate owned by Seritage is in prime suburban locations, the REIT is also involved in re-developing the assets into modern mixed use facilities. If executed correctly, this strategy could substantially increase the value of the assets, boosting shareholder equity as a result.
Who’s Involved?
According to SRG’s inside roster, a certain Warren E. Buffett, CEO & Chairman of Berkshire Hathaway (BRK.A), bought two million Seritage A shares, or a 5.2% stake (according to SRGs latest proxy), at the end of 2015 with his own money. The shares were around $US 35 each at the time.
What’s interesting here is that Berkshire Hathaway, led by CEO Warren Buffett has also extended SRG a $US 1.6 billion loan at 7% interest to assist with their re-development endeavors. That equates to nearly $30 million a quarter in interest income for Berkshire Hathaway.
With Berkshire having the first claim on assets should SRG find itself in bankruptcy, it seems like Buffett is hedged quite nicely no matter which way the SRG story goes.Â
Legendary value investors and long-time pupils of the Buffett school of investing Mohnish Pabrai of the Dalal Street Fund and Guy Spire of Aquamarine Fund also acquired serious positions in the company during Q2 2020.
Based on their 13F filings, both funds acquired roughly 4.7 million and 500 thousand of the company’s 38.6 Million shares outstanding respectively.
What’s The Thesis?
SRG’s Q2 financial supplemental information says that SRG currently has 38.6 million shares outstanding with 1.012 Billion dollars in shareholder equity, creating a book value per share of roughly 26. By comparing SRGs current share price with their book value per share, we can see that they’re currently trading at a 45% discount to their book value per share.
Essentially book value is the sum of the business assets, minus any debt’s its carrying. So, when a company is trading below its book value, it basically means you can invest in the company at a discount to their underlying net asset value.
The fact that SRG is trading at such a significant discount to its book value makes it a screaming bargain for value investors like Buffett, Spire, and Pabrai who clearly believe that SRG will make it through the current downturn and prosper on the other side of it.
While it gives me confidence that guru investors like Buffett, Pabrai, and Spire all have a significant stake in SRG, there is still a lot that could go wrong with SRG, given the company’s reliance on debt. That’s why it’s worth weighing up the risks before considering SRG as an investment.
This article from Barrons gives away some of Mohnish Pabrai’s thought’s on Seritage back in 2017 when his fund sold off their initial stake in the REIT.
The Money Pal is published and provided for informational and entertainment purposes only and is general in nature.  The information in this Blog and newsletter constitutes the Content Creator’s own opinions. The information should not be regarded as financial advice.Â