Sears reit plan good news for investors

Sears Holdings Corp chief executive Eddie Lampert is almost 10 years into his turnaround effort and he's finally doing what many investors wanted him to do from the start: sell the company's real estate.

Sears said that it was considering selling 200 to 300 stores to a newly formed real estate investment trust, the first step in a plan that could offload most of the chain's 1,800 locations. Spinning off the property into a reit could generate US$1.8 billion to US$1.9 billion, according to Evercore ISI. Sears would then lease the properties back.

The move was cheered by investors, who have been clamouring for a real estate deal since Lampert first merged Sears Roebuck & Co and Kmart Holding Corp in 2005. Sears has suffered nine straight quarterly losses and exhausted many other avenues for raising cash, including the spin-off of its Lands' End chain and the sale of part of its Canadian operations.

That has turned real estate into a final frontier. Still, the latest fundraising venture would leave Sears with a hefty annual rent bill and spotlight the uneven quality of its properties.

"There is no doubt that there is underlying value in Sears real estate," said DJ Busch, an analyst at research firm Green Street Advisors.

"Most of the value, however, is located at the higher-productivity malls. There is little to no value at the lower end of the quality spectrum."

A Sears property in Thousand Oaks, California, for example, boasts a surrounding median household income of US$101,000. Another that's available for rent in northeastern Philadelphia, meanwhile, has a median of US$38,390.

Companies typically create reits to lower taxes and boost returns to their shareholders. The trusts do not pay federal income taxes so long as they distribute at least 90 per cent of their taxable earnings as dividends. Earlier this week, casino operator Pinnacle Entertainment became the latest company to announce it was creating a reit, after coming under pressure from an activist investor.

Speculation that Sears was forming a reit grew last year after it established its Seritage Realty Trust as a separate legal entity. That business, based in Greenwich, Connecticut, spotlights properties that Sears is offering for rent or redevelopment. Chris Brathwaite, a spokesman for Sears, declined to comment on whether Seritage would be the vehicle for spinning off the company's real estate.

Sears would be different than most reits in that its stores would be the only tenant in most cases. That makes it "a tricky proposition," Busch said. The trusts tend to be prized "because most own good quality real estate with a diversified tenant base."

The company's Sears and Kmart chains have suffered years of declining sales, making them less-than-ideal tenants. Still, Sears has already been working to entice other retailers to its properties - either to share the space or take it over entirely.

Last month, Sears announced plans to rent out space in seven northeastern stores to Primark Stores, a British budget-clothing retailer. In Pennsylvania's King of Prussia Mall, Sears will vacate its space and Primark will move in.

If Sears could eventually install other retailers at most of its locations, "you could be left with a reit that has value," said Matt McGinley, an analyst at Evercore ISI in New York.

If the company completes the reit deal, it may ultimately own 400 to 500 stores and lease the remainder, said chief financial officer Rob Schriesheim.

"We would realise substantial proceeds from such a sale, which would further enhance our liquidity," he said.

Still, spinning off the real estate would not solve Sears' cash shortages, McGinley said. He estimates that the amount raised by the reit deal is "only sufficient to offset their current operating losses".

Sears's operations used US$1.1 billion in cash in the last fiscal year, a rate McGinley estimates will accelerate. It posted a US$1.4 billion loss.

Sears is taking other steps to raise money. In the past two months, it has announced rights offerings for US$625 million in notes and warrants, along with as many as 40 million shares of Sears Canada.