Did Mr. Market have a stroke this morning?

No, not GME, talking about SRG and its preferred

SRG lost over 30% this morning, down to as little as $5.60 from $9.30 last week, and currently at $6.60. Obviously the market hates its new quarterly release. I read it this weekend but didn’t flag any big negative changes, so I’m re-reading the quarterly report now.

Quick Update: I had been ignoring their press release, and that’s where the miss was. The market reaction is to that in only 6 weeks since the April 1 update they have reduced the estimated range for portfolio sales to only $695M- $950M. That’s a reduction of $4-$6/share, but its probably nowhere near that bad. First the carrying value of all their real estate is $750M, and their sales portfolio doesn’t include all of properties. So their future sales estimates are still coming in close to or above book value. But it’s another nail in the coffin of managements credibility, and hopes they’d still return anywhere near the high teens.

I had sold out of SRG last month because of concerns about how long the remaining liquidation was taking. I’m also not enamored of management, and have no hope they’ll get anywhere close to their original $18-$24 distribution estimate. They’ve also been floating a sale of the entire business for a year now with no takers.

But so far I don’t see any reason to think they won’t get close to $10 in distributions to shareholders, if not more. Despite having to endure the massive headwind of a large increase in interest rates since they first started the liquidation, they’ve booked gains on sale roughly equal to their write-downs the last few years. With rates plateaued the risk of large future impairments would seem remote, and booking more gains on sale in the future seems likely.

Also G&A and interest costs have declined substantially, their leverage is much diminished and they are as little as a year away from being debt free. So the burn rate of the liquidation should be far less going forward.

Their preferred also took a significant hit. It’s down to as low as $23.20, when its been trading close to $24 and even as high as $24.50. Given that we have close to $900M in assets to cover barely over $300M in liabilities (debt was paid down to $280M last month), the preferred not only seems safe but almost certain to be repaid sometime next year at $25 while yielding 7%. At $23.20 that’s a yield to maturity of roughly 15%, so I did pick up some as a “cash equivalent” for my portfolio.

I’ve been a lot more tentative about buying SRG common until I’ve more comfortable with my review, but so far it seems like a huge over-reaction.