By John Whitefoot, BA What’s the best way to breathe life into a slumping stock like Seritage Growth Properties (NYSE:SRG)? Let it be known that Warren Buffett has taken a sizable chunk in the company. It’s one thing for an investing giant like Warren Buffett to add a stock like SRG to Berkshire Hathaway, but it’s quite another for him to add Seritage stock to his personal portfolio. In the day since announcing his eight-percent stake in SRG stocks, the company’s shares spiked more than 20%. Should investors follow suit or did they miss the boat on Seritage Growth Properties?
Warren Buffett Takes 8% Personal Stake in SRG
It was another surprise move by the world’s greatest living investor. Warren Buffett, the $66.0-billion man, recently purchased $70.5 million worth of shares in the Sears Holdings Corporationreal estate spinoff, Seritage Growth Properties.
Not surprisingly, the announcement helped drive up the share price in both Seritage and Sears Holdings. Shares in Seritage soared more than 20% on December 10, hitting an intraday high of $42.33.
Shares in Sears Holdings, home of the much-read Christmas Sears Wishbook, were up a more modest five percent, though this is still significant, especially when you consider Sears Holdings’ performance has been abysmal, particularly throughout 2015. Before the announcement, Sears’ share price was down 36% year-to-date. Now, it’s only down 34% since the beginning of the year.
What’s the allure of Seritage Growth Properties? Remember, Buffett’s two-million-share stake, giving him an 8.02% position in the company, is for his own personal portfolio. Does he have a gut feeling about Seritage or is it the allure of the investing acumen of the struggling retailer’s Chairman and CEO, Eddie Lampert?
Sears’ Real Estate Gold Rush
I’m not going to be the one who casts doubt on what motivates Warren Buffett. But I think his stake in Seritage is not unlike the lessons learned during the gold rush. You can mine for gold or you can sell pickaxes. I think Buffett sees the value in selling pickaxes—or rather, being a landlord.
Back in July, Eddie Lampert spun off Seritage, which is a self-managed real estate investment trust (REIT), in order to capitalize on the value of its real estate and return Sears to profitability. It used the $2.7 billion in proceeds from the rights offering to purchase the properties.
As of September 30, 2015, Seritage’s portfolio included interests in 266 retail properties totaling over 42 million square feet of leasable area. This includes 235 wholly owned properties (which it leased back to Sears) and 31 properties owned through investments in unconsolidated joint ventures. At the end of the third quarter, the portfolio was 99.4% occupied. (Source: “Seritage Growth Properties Reports Third Quarter 2015 Operating Results,” Seritage Growth Properties, November 12, 2015.)
At the end of the third quarter, the company’s total market capitalization was $3.2 billion. Seritage Growth Properties had $51.5 million in unrestricted cash on hand and restricted cash of $100.3 million. SRG said it expects to declare a common dividend prior to the end of 2015 to meet its REIT distribution requirements, but it has not yet announced the amount.
Enthusiasm for Seritage Growth Properties Growing
Buffett is not alone in his enthusiasm for Seritage Growth Properties. Bruce Berkowitz, an equity fund manager, founder of Fairholmes Capital Management, and disciple of Buffett, disclosed a 13.2% holding in SRG stock in July and continued to add to his holding in October and November.
However, unlike Buffett, Berkowitz is a little more forthcoming about why he’s interested in SRG stock:
“A recent analyst report noted that ‘the demographic profile of the [Seritage] owned portfolio is surprisingly good, with 10-mile density and incomes of 692k and $77k, respectively, slightly better than the mall REIT portfolio averages of 680k and $77k.’ We are bullish also based upon our independent assessment of real estate values, recent transaction data, and expected dividend increases as the company repositions properties to command higher rents from new tenants.” (Source: “FAIRX Semi-Annual Report,” Fairholmes Capital Management, July 2015.)
Buffett couldn’t have said it better himself.
SRG is in its infancy, having just reported its first financial and operating results for its first quarter as a public company. It also hasn’t even announced its dividend amounts yet. While Sears Holding Company isn’t faring so well, Seritage is on the right track.
In addition to income coming in from Sears and K-Mart, Seritage Growth Properties is looking to add additional value through redevelopment projects aimed at more diverse tenants and materially higher rents.
When it comes to being a landlord, that’s the best way to create significant value for shareholders.