One of the advantages Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) has over other investment firms is the ability to structure investments in ways that create an outside payoff for the corporation. A payoff that it might not have been able to achieve by using traditional methods such as investing in debt and equity on the open market.
An example of this strategy in action is its agreement with Seritage Growth Properties (SRG, Financial).
A company needing cash
Seritage started life when it was spun off from Sears Holdings as part of the now-bankrupt retailer's attempts to reinvigorate itself.
Management decided that spinning off the company's real estate into a new entity would free up cash. What’s more, the new business would have the flexibility to borrow and invest in its portfolio of property and hopefully generate better returns.
The problem was that as Sears circled the drain, Seritage was effectively guilty by association. It struggled to raise the money it needed to push ahead with redevelopment plans from traditional channels.
That is when Warren Buffett (Trades, Portfolio) and Berkshire stepped in to fill the gap. The Omaha, Nebraska-based conglomerate offered the real estate company a $2 billion term loan facility secured by mortgages on its real estate properties.
Seritage could not have asked for a better partner. A few months after the deal was signed, Sears collapsed, which would have almost certainly spooked other creditors.
Then two years after the agreement, in 2020, the coronavirus pandemic laid waste to the global retail industry. As a patient source of capital, Berkshire has been able to give the company flexibility and time to meet its obligations.
Berkshire and Buffett have been incredibly flexible here.
The facility originally matured in July 2023. However, the two companies agreed on an extension through July 2025, as long as the balance was reduced to $800 million.
According to Berkshire’s latest 10-Q, the balance is now below $800 million.
A higher rate of return
That gives the company a couple of years to pay off the remaining balance. Considering its current market capitalization of $389 million, this is quite a significant sum, but it is also owed to a creditor that is in no rush. Berkshire is happy to wait to get repaid, no matter how long it takes.
Berkshire is not interested in pushing companies into bankruptcy in order to get its hands on assets. It wants the money and Buffett is not the sort of person to get entangled in a messy legal fight to retrieve it. In terms of the conglomerate's overall asset base, $2 billion was never a significant amount for the group.
However, it did provide an opportunity for the Oracle of Omaha to deploy a sum of money at an attractive rate of interest.
The original loan had an interest rate of 7% plus additional fees, an attractive rate of return for 2018, when the yield on the 10-year Treasury note was around 3%.
This is one of the many deals the Oracle has inked over the past couple of decades, which have incredibly favorable economics.
Investors can learn from this approach because it shows what can be done when one plays to one's strengths and makes the most of any competitive advantage.
Berkshire‘s competitive advantage is its financial resources and long-term time horizon. Individual investors are also able to take a long-term view when analyzing investments. We might not be able to offer $2 billion loans to struggling real estate companies, but there will be other opportunities. We do not have to stick to strict investment mandates or worry about keeping up with other funds in the race for assets. That is something we can take advantage of in the long run.
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