Ken Griffin, Bruce Berkowitz Report Big Stakes In Sears’ REIT Spinoff

In recent Schedule 13G filings with the SEC on Seritage Growth Properties (NYSE:SRG), which is the real estate spinoff of Sears Holdings Corporation (NASDAQ:SHLD), both Ken Griffin’s Citadel Investment Group and Bruce Berkowitz‘s mutual fund Fairholme have large stakes in the REIT. Griffin disclosed a 7.2%, or 3.84 million share, stake in the company, while Berkowitz reported holding 3.25 million shares, reported as a 13.2% stake. Interestingly, there appears to be a discrepancy in the reporting of ownership by the two funds. Seritage Growth Properties began trading on the New York Stock Exchange on July 6, 2015.

Citadel Investment Group is one of the largest alternative investment management firms in the world, founded by Kenneth Griffin in 1990. As of January 2015, Citadel is the 13th-largest hedge fund in the United States, according to a ranking by industry publication Absolute Return. Ken Griffin, who kicked off his trading career in the 1980’s in his Harvard dorm room, is considered one of the most forward-thinking and experienced minds in the financial industry. His firm currently manages $26 billion, which represents a 170% increase from January 2012, when the fund had recovered all of the investment losses it suffered as a result of the financial crisis.

Bruce Berkowitz, who was named the domestic stock fund manager of the decade for the 2000’s by Morningstar, founded Fairholme Capital Partners in 1997 and the Fairholme Fund (Fairx) in 1999. Since its inception the fund has delivered compounded returns of over 430% and achieved 123 positive 5-year return periods, compared to just four negative 5-year return periods. The fund’s public equity portfolio stood at $5.34 billion as of March 31. Prior to founding Fairholme, Berkowitz served as a Managing Director and Senior Portfolio Manager at Smith Barney, Inc. from 1995 to May 1997, as well as a Senior Vice President and Portfolio Manager at Lehman Brothers Holdings, Inc.

An everyday investor does not have the time or the required skill-set to carry out an in-depth analysis of equities and identify companies with the best future prospects like a fund with the knowledge and resources of Citadel can. However, it is also not a good idea to pay the egregiously high fees that investment firms charge for their stock picking expertise. Thus a retail investor is better off to monkey the most popular stock picks among hedge funds by him or herself. But not just any picks mind you. Our research has shown that a portfolio based on hedge funds’ top stock picks (which are invariably comprised entirely of large-cap companies) falls considerably short of a portfolio based on their best small-cap stock picks. The most popular large-cap stocks among hedge funds underperformed the market by an average of seven basis points per month in our back tests whereas the 15 most popular small-cap stock picks among hedge funds outperformed the market by nearly a percentage point per month over the same period between 1999 and 2012. Since officially launching our small-cap strategy in August 2012 it has performed just as predicted, beating the market by over 80 percentage points and returning over 139%, while hedge funds themselves have collectively underperformed the market (read the details here).

Seritage Growth Properties (NYSE:SRG) is a publicly-traded Maryland real estate investment trust (REIT) that is primarily engaged in the real property business through its investment in its operating partnership, Sears Holdings Corporation (NASDAQ:SHLD), which is a leading integrated retailer. Seritage Growth Properties recently commenced a rights offering for at least 53.29 million class A common shares, which were listed and began trading on the New York Stock Exchange (NYSE), under the ticker symbol “SRG”, on July 6. Under the terms of the rights offering, Sears Holdings Corporation (NASDAQ:SHLD) distributed to its stockholders one transferable subscription right for each share of its common stock held as of 5:00 p.m. ET on June 11. Specifically, the subscription right enables its holder to buy one-half of one common share of Seritage for $29.58 per whole share.

The real estate spinoff of Sears Holdings Corporation raised approximately $1.6 billion of capital through its right offering. Subsequently, Seritage Growth Properties used the money to acquire 235 Sears and Kmart-branded stores from Sears, including the 50% interests of Sears in joint ventures with General Growth Properties Inc. and The Macerich Company, which together hold an additional 31 properties of Sears. The transaction amounted to $2.7 billion and will enhance Sears’ financial flexibility and unlock new growth opportunities for the company. In turn, Seritage Growth Properties will lease back the majority of the acquired properties, including the ones owned by the joint ventures, to Sears under a master lease agreement, while the remaining properties will be leased to third parties.

But why would anyone invest in this REIT? Generally, investors are investing in REITs for their high levels of steady current income and the opportunity for long-term growth. Each REIT is required by law to pay out to its shareholders at least 90% of taxable income, so REITs tend to be among the companies that distribute the highest dividends, serving as one of the main reasons investors pour capital into them. However, the risk associated with a possible investment into Seritage Growth Properties is the potential bankruptcy or insolvency of its primary tenant, Sears Holdings Corporation. However, this outcome would not mean the end of the world for Seritage as it owns all the real estate properties. Hence, it seems that a potential investment in Seritage is not associated with too many risks, while the upside potential remains very strong and positive.

Moving on to what the newly-formed REIT provides, Seritage Growth Properties (NYSE:SRG) allows Sears’ management to raise some capital to help the struggling retailer, which hasn’t generated a profit for several years, and also attract some investors who don’t see value in Sears, but are intrigued by the company’s real estate properties. Finally, the REIT cash infusion will definitely enhance Sears’ future development and assist it in becoming a member-centric integrated retailer, so it’s worth keeping a close eye on this company too. Within our database, Edward Lampert’s ESL Investment represents the largest shareholder in Sears Holdings Corporation (NASDAQ:SHLD) with 26.44 million shares. Lampert also serves as the company’s CEO.

Disclosure: None