- By Bram de Haas
Seritage Growth Properties (SRG) is a REIT spin-off of Sears Holding (SHLD) which Buffett bought in for his personal account in 2015. Barron's just published a feature with some scary paragraphs:
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Warning! GuruFocus has detected 6 Warning Signs with SHLD. Click here to check it out.
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The intrinsic value of SHLD
Concerns about a potential Sears bankruptcy filing have attracted short sellers to Seritage, which Lampert also chairs. If Sears reneges on terms of its master lease and stops paying rent, Seritage might find itself temporarily short of income, which would hammer its stock. The stock, at a recent $43, is off about 20% in the past year.
The Barron's feature happens to be an excellent nuanced article that deserves to be read closely, but to summarize it crudely:
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If Sears bankrupts in the next three years Seritage stock might take a hammering
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It could require asset sales or private transactions to raise capital to stabilize the company losing its primary tentant on such short notice.
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At that point it might be a highly compelling bargain
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It is a bargain anyway if you have a 10 year time horizon but you might face said near time problems.
When Buffett originally bought Seritage in the mid $30s I wrote the following (emphasis mine):
The current rent paid by Sears is on the low side of the spectrum, not surprising given the poor state of its operations. I think Buffett's master plan entails that either the turn-around at Sears gains traction at some point, and when leases have to be renewed, better deals can be negotiated, but he also wins if Sears fails or better tenants can be found by Seritage. Because REITs pay out so much and pay so few taxes, a inbuilt lever for growth is much more valuable than it is in regular companies. Because REITs usually do not retain much capital, they have a hard time growing earnings, however, that isn't necessarily the case here. Therefore you could argue Seritage should trade at a premium to most REITs, but it doesn't. Seritage trades at 1.4x book value and 13.5 EV to Ebitda. This with a relatively modest amount of debt equal to about 1x its market cap.
Now that it looks like the "ideal" scenario materializes the market is having second thoughts. What if they don't get this space leased out at $4 or more? Stories about malls failing and hedge funds going after malls as the next BIG Short are suddenly ubiquitous; Bonds Tied to Dying Malls Could Be the Next 'Big Short' and The Hedge Fund Manager Who's Shorting America's Malls.