SRG - Seritage Growth Properties

[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 

[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.