Alex Bossert of Bossert Capital presented his in-depth investment thesis on Seritage Growth Properties (US: SRG) at Best Ideas 2020.

Thesis summary:

Seritage Growth Properties is a REIT created in July 2015 through a rights offering to Sears Holdings shareholders. Through this equity raise and a debt offering, Seritage purchased select properties from Sears in a sale-and-leaseback transaction. Seritage now owns 217 high-quality properties in advantageous locations in 44 states across the United States.

Seritage is transforming legacy Sears real estate for 21st-century use. The superior location of this real estate is reflective of the influence Sears had at one time as the dominant retailer of an era. That status allowed Sears to command favorable locations in the best malls in the United States. Seritage’s real estate is cherry-picked and includes some of the best mall and free-standing locations from the Sears portfolio.

At the time it was founded, Seritage leased the majority of properties to Sears Holdings. Seritage has been aggressively diversifying away from Sears and rental income from Sears is no longer a material factor (representing less than 11% of Seritage’s annual contracted rental income). Seritage has successfully replaced nearly all the Sears income it was receiving when Seritage was founded. Although investors may continue to associate Seritage with Sears, the rental income from Sears is no longer material.

Sears has vacated most of the real estate leased from Seritage. This enables Seritage to redevelop and retenant the real estate. In the process, Seritage is raising rents from ~$4 per square foot to $20+ per square foot, and earning incremental unlevered cash returns of 10-11%. With cap rates for these properties around 5.75% after stabilization, Seritage is creating ~$2 of value for every dollar invested in redeveloping properties, on an unlevered basis. With the use of modest leverage, the returns to equity holders are more compelling.

At a recent price of $40 per share, Seritage trades at a 40+% discount to net asset value, which Alex estimates exceeds $70 per share. Additionally, the company is growing net asset value by $5-8 per share annually. Seritage has a large supply of real estate available to redevelop, and this level of value creation is likely to be sustained for many years. A $2 billion term loan from Berkshire Hathaway has taken funding risk off the table.

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About the instructor:

Alex Bossert started Bossert Capital in February 2017 to invest money on behalf of a select group of long term oriented, business minded, wealthy families and individuals. He began investing his own money at 10 years old. Alex has studied and modeled his investing strategy after investors such as Warren Buffett, Charlie Munger, Benjamin Graham, Joel Greenblatt, Seth Klarman, Mohnish Pabrai and Guy Spier among others. Prior to starting Bossert Capital, Alex held analyst roles at multiple investment firms. From 2010 – 2013 he was an analyst at Milestone Capital, a value focused investment firm based in Minneapolis, Minnesota. And from 2014 – 2016, he was an analyst at Granite House Capital Management in Boston Massachusetts. In 2014, he was accepted as a member of the Value Investors Club. He is also the youngest ever admitted member of the SumZero buyside network and was one of 14 buyside analysts in the nation to be named to the 2012 SumZero Buyside Analyst Honors which was published in the Wall Street Journal and CNBC. Over 8,000 analysts were considered. He is also featured in a chapter in the biography of investor Warren Buffett called “Of Permanent Value: The Story Of Warren Buffett.” He maintains a blog “Alex Bossert‘s Thoughts On Value Investing” with over 450 subscribers and over 250,000 site views.