Seritage Financing Ties Warren Buffett in With Sears

Seritage Growth Properties (NYSE: SRG) is far from a household name. With a $2.5 billion market cap but barely 300,000 shares traded on an average day, that might be expected. What matters here is that this real estate investment trust (REIT) was created by Sears Holdings Corp. (NASDAQ: SHLD) — and what matters even more is that Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) will be loaning up to $2 billion to Seritage.

Seritage has entered into a $2.0 billion term loan facility with Berkshire Hathaway Life Insurance Company of Nebraska. The move effectively refinances all existing debt and also raises incremental capital. According to Seritage, the capital also will “fund a robust redevelopment pipeline.”

Seritage owns 225 properties and has joint ventures for another 24 properties with a total of more than 39 million square feet of gross leasable area. Seritage was formed and listed as a New York Stock Exchange stock in July 2015 in conjunction with the acquisition of a portfolio of real estate from Sears Holdings. Roughly 60% of the common equity in Seritage is owned by the top 10 institutional shareholders. Details of the inner workings of the financing were broken down as follows:

The $2.0 billion Term Loan Facility, which matures on July 31, 2023, provides for an initial funding of $1.6 billion at closing and includes a committed $400 million incremental funding facility. Funded amounts under the Term Loan Facility bear interest at a fixed annual rate of 7.00%, while amounts available under Incremental Funding Facility will be subject to a 1.00% annual fee until drawn.

Seritage may have ties to Sears, and it may have a blended hybrid name that ties it back to Sears, but the 2017 annual report pretty much sums up how Seritage is focusing on non-Sears tenants as the major growth for redeveloping properties. The 2017 report showed this:

By the end of 2018, we expect to receive 65% of our income, based on signed leases, from non-Sears tenants and to have our Sears Holdings exposure down to 35% (we started with 80% of our income from Sears Holdings). Another metric that reinforces how quickly we have transformed the portfolio’s composition: when we started in July 2015, all but 11 of our properties had Sears Holdings as the primary tenant; at the end of 2017, 111 assets in the portfolio no longer had Sears Holdings as the primary tenant.

Benjamin Schall, president and chief executive officer of Seritage Growth Properties, said of this deal:

This new financing is a transformational step in the evolution of our Company, which we started three years ago, and positions us to further accelerate our role as a leading retail and mixed-use developer across the country. We very much appreciate Berkshire Hathaway’s confidence in our team and platform, and are energized by our growing opportunities to create lasting value for our shareholders, partners and local communities.

Buffett has shown more interest in being in on the larger retail tenant efforts. Now his company is doing a financial deal that ties back to Sears and the growth of mixed-use retail and residential properties.

Seritage shares closed at $42.31 on Tuesday, in a 52-week range of $34.07 to $49.88 and with a Thomson Reuters consensus analyst target price of $44.00. Its shares were trading up over 9% at $46.45 after the opening bell on Wednesday.