Guru's Hedge Fund Reduces Position in Struggling REIT

RBS Partners, created by Eddie Lampert, sells off shares of REIT leasing former Sears properties

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Mar 19, 2018
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The Florida-based hedge fund founded by Sears CEO Eddie Lampert reduced a position in a struggling real estate investment trust (REIT) that leases out properties once belonging to Sears Holding Corp. (SHLD, Financial)

RBS Partners sold 97,000 shares of Seritage Growth Properties (SRG, Financial), reducing its stake 18.63% during the final months of the year.

Seritage, which was created around 2015, is facing financial dilemmas, which some fear could push it into bankruptcy if declining revenues don’t pick up in the next two years. Over 50% of its float is shorted. The company has a dividend yield of 2.84% versus an industry median of 4.95%.

RBS Partners holdings

At RBS Partners, Lampert is listed as reporting manager and CEO of the general partner. Lampert began the hedge fund in 1998 with $28 million in start-up capital. He made his first fortune with passive investments in stable companies like IBM (IBM) and American Express (AMEX).

In total, RBS Partners oversees a handful of stocks in a $433 million portfolio. It had no sales or new buys in the fourth quarter.

Its only other change in the final months of the year was a reduction of 8.54% in Florida-based auto retailer, AutoNation Inc. (AN, Financial). It reduced its position by about 921,000 shares to a total holding of about 4 million shares. The sale price in the fourth quarter was about $50.66 a share.

AutoNation is nearly 48% of the portfolio, followed by apparel and specialty store Land’s End Inc. (LE, Financial) at 28.29%. About 17% of the portfolio is in Sears while Seritage holds 3.95%. About 2.86% of the portfolio is in Sears Hometown and Outlet Stores Inc. (SHOS, Financial).

Seritage Growth Properties

The hedge fund loaded up on shares in the second quarter of 2015 as the REIT was being established to purchase 266 properties from Sears.

At the time, RBS Partners bought 444,000 shares for an average price of $39.65 a share. The number of shares peaked at over 526,000 in the first quarter of 2017.

At the end of that year, it sold off 97,000 shares for an average price of $41.75 a share. The estimated loss was 7%. The impact on the portfolio was a reduction of 0.83%.

RBS Partners now holds 424,000 shares. It makes up 4% of the portfolio.

Sears headwinds

The company has a market cap of $1.99 billion. Year to date, the stock has dropped in value by 12%, and by 21% in the last 12 months. Many say the weak stock price stems from troubles at Sears.

The REIT makes its money mostly by leasing properties to specialty retailers at substantially higher rents. It also receives more than 50% of gross rental revenue from Sears Holdings.

Gurus like Mario Gabelli (Trades, Portfolio), Mohnish Pabra and Bruce Berkowitz (Trades, Portfolio) invested in the REIT just in the last year. Berkowitz, a former member of the Sears board of directors, said a group of real estate professionals who analyzed the REIT said it had been undervalued at the time.

On Thursday, Sears announced its fourth-quarter and full year 2017, showing revenues sank $4.38 billion in the fourth quarter ended Feb. 3, compared to $6 billion in the prior year’s fourth quarter.

Net profit in the fourth quarter saw an increase to $182 million, or $1.69 per diluted share, compared to a net loss of $607 million, or $5.67 per diluted share in the prior-year quarter.

Lampert became chairman of Sears in 2004. He helped craft the merger of the company with Kmart, which was in bankruptcy.

CNN reports Lampert started the hedge fund, ESL Investments, in 1998 with $28 million in start-up capital and made his first fortune with passive investments in stable companies like IBM (IBM) and American Express (AMEX).

Financial reporting

GuruFocus ranks Seritage 4 in 10 in financial strength, profitability and growth. The company does not report a price-earnings ratio. It has a price-book ratio of 2.23 versus an industry mean of 1.08. It has a price-sales ratio of 5.39 versus an industry median 7.16.

Its dividend yield is 2.84% versus an industry median of 4.95%.

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The investment was created in 2015. Financial reporting began in December 2016. In revenue per share, the company has seen a decline of 12.50% over the last 12 months. Revenue per share was $1.23 a share in 2016. In December 2017, it had dropped to 96 cents a share.

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NYSE:SRG data by GuruFocus.com

Earnings per share rose to 0.89 cents in December compared to a loss of 59 cents a share in March 2017. In gross margins, Seritage reported 155.67% in December after sporadic growth over several months.

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