Warren Buffett just announced a $70.5 million investment in a little-known real estate firm.
The company is a real estate investment trust, or REIT, called Seritage Growth Properties (NYSE: SRG). Don’t be surprised if you’ve never heard of Seritage. Valued at $1 billion, Seritage is small enough to fly under the radar of most investors.
Seritage Growth Properties quietly went public in July, when it was spun off from Sears Holdings (NASDAQ: SHLD). Sears has been suffering years of shrinking sales and growing losses. Just last year, Sears posted a net loss of nearly $1.7 billion.
A hedge fund manager named Eddie Lampert has been leading Sears since 2013. He determined that one way to raise cash for the troubled retailer was by selling off its real estate holdings.
So in July, Sears created Seritage Growth Properties. Seritage in turn acquired 254 retail properties from Sears for $2.7 billion. The transaction gives Sears a much-needed lifeline, which could keep the company afloat for another year.
Warren Buffett would never invest in Sears stock. Instead, he’d rather do this.
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Why Did Warren Buffett Buy the Sears REIT?
Just-filed SEC filings reveal that Warren Buffett personally owns 2 million shares of Seritage, or an 8% stake in the company. Seritage shares jumped nearly 17% on the news, valuing Buffett’s stake at $82 million.
There are two surprising aspects to the news.
First, Buffett typically makes investments through Berkshire Hathaway (NYSE: BRK-B). The vast majority of his $64 billion net worth is invested in Berkshire stock.
Second, Buffett typically focuses on investments in undervalued operating companies. Buying real estate has never been his forte. That’s perhaps the reason he chose to make this investment personally, rather than through Berkshire.
Yet Warren Buffett has recently been active with other real estate investments. Last month, Berkshire’s HomeServices of America division bought a real estate broker.
Buffett’s investment comes at a time when REITs have been under pressure. Investors are concerned that rising interest rates will increase borrowing costs for real estate companies, which will in turn hurt their bottom lines.
That’s one reason why the Vanguard REIT ETF (NYSEArca: VNQ) – the largest REIT-based exchange-traded fund – is down 4% year-to-date.
Buffett has a long history of making contrarian investments. So it shouldn’t be a huge surprise that he’d choose to buy a REIT before the upcoming Federal Reserve meeting on Dec, 16.
There are many reasons to invest in REITs today. Interest rates will remain low, even if the Fed raises rates by a quarter percentage point. Just as important, occupancy rates are extremely high, and that translates into better cash flow for landlords. And finally, REITs offer healthy dividend yields of 4% on average.
Even at age 85, Warren Buffett keeps other investors guessing about his next move. And that’s just one aspect to his phenomenal success.
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