Sears taps its real estate to bring in cash
Sears Holdings (SHLD) will sell some of its properties to two newly created ventures, which in turn will lease them back to the company, generating much-needed cash.
In one deal, billionaire Edward Lampert's struggling retail empire will form a real estate investment trust (REIT) with Seritage Growth Properties that will acquire about 254 Sears Holdings properties, most of which are operated as Sears and Kmart stores. The venerable company, which owned or leased 1,725 Kmart and Sears stores combined as of January, expects to earn $2.5 billion from the sale.
The other REIT Lampert formed was with General Growth Properties (GCP). Sears will contribute 12 properties that are valued at $330 million and will continue to operate them. General Growth will make a cash contribution of $165 million to the joint venture in exchange for a 50 percent stake. Sears Holdings will own the other 50 percent when the deal is completed.
"Today's announcement demonstrates our ability to unlock a small portion of Sears Holdings' vast and valuable real estate portfolio, and represents an important step in the continued transformation of Sears Holdings," said Lampert, who is both the company's CEO and largest shareholder, in a press release. "We continue to show that Sears Holdings is an asset-rich enterprise with multiple levers to generate financial flexibility, while creating shareholder value."
When Lampert first broached the idea of putting the retailer's real estate holdings into a REIT in November, shares of the company surged 31 percent, the most they have ever gained in the decade that he has run the company. Lampert has sold real estate and leased other properties to keep Sears afloat among other moves, such as spinning off preppy clothing brand Land's End and selling off a significant stake of the chain's holdings in Canada.
"A lot of retailers will be paying close attention," said Matthew L Cypher, director of Georgetown University's Real Estate Initiative, in an interview. "At the end of the day, Sears isn't a real estate company. It's a retailer."
REIT investors, though, may be leery about investing in company so closely tied the troubled retailer, he said.
Shares of the Hoffman Estates, Illinois-based Sears, which initially traded up on the news, fell 5 cents to close on Wednesday at $41.33. They have gained more than 25 percent since January.
As of January, Sears had about $250 million in cash, a decline of more than 70 percent from January 2014, and it had about $800 million available on its credit line. Sears burned through $2 billion in cash last year and has generated more than $1 billion from the moves Lampert has made. Unfortunately for Sears, it has lost more than $7 billion over the past four fiscal years.