Sears reit may be blueprint for future deals
Newly formed trust one of the more dramatic moves chief executive Lampert has made to reshape the retailer after years of losses
Sears Holdings Corp's plan to raise more than US$2.5 billion from its real estate serves as a blueprint for future deals, helping chief executive Eddie Lampert deliver the financial returns he has long promised to investors.
A newly formed real estate investment trust, Seritage Growth Properties, will buy 254 Sears and Kmart locations and then lease them back to the retailer. As part of the plan, Sears also will contribute 12 properties to a 50-50 joint venture with mall operator General Growth Properties in exchange for US$165 million in cash.
While the company has previously sold locations, leased space to other retailers and developed properties, many investors have been waiting for Lampert to form a reit since he merged Sears and Kmart more than a decade ago. The shares surged 31 per cent when the company announced in November that it was exploring the possibility.
"For operators of high-quality malls, there have to be more deals to be done with Sears," said Cedrik Lachance, a managing director at Green Street Advisors in Newport Beach, California.
Reits composed of a single retailer are rare because investors want to spread risk among multiple tenants. Yet investors could bite if they saw the transaction as a way to wring more value from the Sears properties, most likely by breaking them up, Lachance said.
"The big challenge of the single-tenant reit is the credit quality, of course, of that tenant," he said. "In this case, I think it's universally known that the credit quality of Sears is at best poor, and so buyers of the Seritage reit will look for a redevelopment angle."
The deals announced last week mark one of the more dramatic moves Lampert has made to reshape the company after more than three years of losses. Lampert has sold and spun off assets such as the Sears Hometown & Outlet Stores chain and the Lands' End brand while working to transform the company into a leaner retailer, focused on generating sales online and from loyalty-programme members.
Seritage will fund the purchase with debt and proceeds from a rights offering that is expected to close by the end of the second quarter.
Lampert's ESL Investments hedge fund may own 53.2 per cent of any Sears reit spin-off, if the retailer exercises warrants for 10.5 million shares controlled by Lampert and ESL, according to Bloomberg Intelligence analyst Noel Hebert. Hebert estimates that Sears could consume at least US$1.5 billion in cash this year.
The structure of the General Growth deal resembled a US$1.8 billion agreement announced in February between Hudson's Bay and Simon Property Group, Lachance said. It gives landlords plenty of flexibility to redevelop the Sears stores.
Green Street lists 131 of Sears' 628 mall stores as being located in top-quality malls. Other landlords with Sears stores in such malls included Macerich and Simon, Lachance said.
"It's a big pool of properties where something can be done, but it can only be done with the mall owner," he said.
The cash infusions come as Sears struggles to return to profitability under its new model. Its loss last year widened to US$1.68 billion as sales slid 14 per cent. All told, Sears has lost US$7.12 billion in its past four financial years.