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!