Summary:

“Risk Comes From Not Knowing What You’re Doing” – Warren Buffett.

Unlike his personal investment in NYU, Buffett has a third partner in the SRG deal who goes by the name of Mr. Market.

I like to own “quality merchandise marked down” and as far as I can tell, WPG’s blue lights are flashing louder than ever.

Earlier this week I wrote an article on Seritage Growth Properties (NYSE:SRG), the new retail REIT that spun out of Sears (NASDAQ:SHLD) with a portfolio of 266 properties across 49 states. Although SER has significant credit risk (91% of portfolio leased to Sears) billionaire investor Warren Buffett was intrigued enough to make a modest $70 million wager to pick up around 2 million shares.

There’s not much historical evidence related to Buffett’s investing acumen as a real estate financier. In a previous Seeking Alpha article I explained that Buffett had once owned Tanger Factory Outlets (NYSE:SKT) (in 1999) and more recently Buffett referenced two personal investments – a 400 acre farm in Nebraska and a retail shopping center near New York University.

The farm and shopping center were both acquired at substantial discounts, Graham explained his NYU investment:

…a bubble had popped – this one involving commercial real estate – and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Buffett went on to recount his focus on finding the unpolished gems – the NYU deal seems comparable to the SER portfolio in that the potential opportunity is to unlock value by investing in underutilized space:

…the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings.

Another similarity to the NYU deal and SER is that Buffett is relying on partnerships since leasing and management are not his circle of competence. Buffett explains,

I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled.