How About Sears Holdings as a REIT?

My most recent post on mall REITs (SPG in particular) got me thinking about Sears Holdings (SHLD), a company that I disparaged a few weeks ago in a post called, “Unsuccessful Profits.” More particularly, my chart on REIT valuation based on square footage owned made me wonder.

As you can tell, price per square foot data can vary quite significantly. Not all square footage is created equal and, ultimately, it’s how you monetize your square footage which really matters. In the case of Sears, though they own a significant amount of retail square footage, the majority is leased to its own businesses which have performed in lackluster fashion to say the least.

Despite this, there has to be some assumption of inherent value in the square footage. (This is something I ignored when I made the statement that Sears’ sales declines and lack of investment in its stores was an unsustainable business model.)

The Company’s 10K is a bit opaque as far as square footage controlled. From the information available, I pieced together that the Company is in control of something like 267 million square feet of retail space. However, it only owns 814 of 3,918 stores and classifies 1,061 stores as “independently owned and operated.” Assuming that the Company could only exercise “REIT-like” control over these stores, it’s “REIT valuable” square footage is probably closer to something like 100-125 million square feet. At the median price to square foot value above ($35.71 per square feet), we would find the owned real estate of the Sears business valued around $4 billion and, at the average price ($49.44 per square feet), a hypothetical Sears REIT should be worth $5-$6 billion.

Sears is currently trading at $7.9 billion in market cap. The above analysis is admittedly rough and back of the envelope, but it does lend some credence to the idea that Sears is very conservatively valued (possibly undervalued) by the market. Even if my argument that the Sears retail business is unsustainable is true and we were to ascribe zero value to Sears and Kmart retail (a horrible over simplification), the value of the Kenmore, Craftsman, Lands End and various other brands is likely worth at least $1-$2 billion (Sears holds trade names and intangibles on the books at $3.3 billion). This ascribes an overall value to the business around $6-8 billion in the most draconian of cases.

As long as Sears and KMart underperform and as long as market value for the stock stays at or below this baseline valuation, it does make a significant case for management to spend money buying back stock and otherwise operating to realize value from the real estate as opposed to throwing money at capex to turn around the standard retail business. The question is, with two retail behemoths the likes of KMart and Sears, how exactly can management catalyze the realization of the underlying “REIT” value in the Company’s real estate? And, can this happen in a timeframe quick enough to provide adequate return to investors who might be thinking about going long on SHLD today?

If any out there in the community have more insight on Sears’ real estate holdings and its potential valuation as a REIT, do feel free to chime in. I admit my analysis is cursory at best, but I think it’s directionally correct and does beg further analysis as SHLD is beginning to look like a more compelling stock despite its retail businesses’ poor operating performance.

Full Disclosure: No positions in SHLD at the time of writing.

Comments

[malach hamo...:]

sears as a reit would have sears and kmart stores as the primary tenants. these stores have been doing horribly and are probably losing money now. thus, a reit based on the sears real estate might be worth a lot less than presented above.

a top retailer - target - was evaluated for splitting off the r/e; even with great leases, the parts are not going to be greater than the whole, particularly when as in sears' case, the retail segment is pure drek

Jun 26 07:59 AM

[jgold47:]

I dont fully buy that. I think the only thing that makes the real estate that sears owns valuable is the fact that there is a sears or K-mart in it. I think you cut the value in half if its vacant. I think the actual sears stores are a complete loss as they are usually the anchor of a mall, which gives you extremely limited re-lease capabilities. The K-Mart properties are a little more valuable, but since there are not many retailers left who want nicely used 100K sq ft builidngs, you will be faced with excessive costs to re lease the spaces, and they are generally not very easy to sub divide into smaller spaces due to the depth.

Jun 26 08:46 AM

[Craigla1:]

Please be sure you look at enterprise value, and not just market cap. SHLD has an EV of roughly $10 billion right now (as the carry a fair amount of debt - a no-no for a retailer).

Jun 26 02:34 PM

[SamiC:]

Other reits need debt added in to the prices to ground them out.
Kmart had 9 billion worth or prop plant and equipment on its balance sheet when it declared bankruptcy. It was then written down to 30 million dollars after bankruptcy based on its earnings generation (none)
Sears also had about 9 Billion on its books, and still sort of does.

remember, some of these properties are fairly worthless as someone said, yet some of them are the most valuable properties in their given towns.

You also forgot the 70% stake in Sears Canada, and remember, leases signed in 1960 for 50 years with an option to renew can have value.

I don't suggest this as a basis for valuing the rest of the stores, but in 2004 Sears Sold 4 stores and assigned 14 leases for 271 million-CAPITAL GAIN OF 241 MILLION TO Home Depot.

Smart people have estimated the real estate alone at 12-20 billion, so mark that down by half to get 6-10, and don't forget nine billion worth of inventory at cost and a billion in cash.

I get something like this:
brands: 3 billion
(people always talk about craftsman and landsend and diehard, but don't forget sears and kmart and kenmore: not worthless!)
real estate: 6 billion
Inventory at cost of 9 billion: 5 billion
Operating business which cleared 800 million from operations in the midst of the worst recession and consumer contraction in decades: (at 5x depressed cash flow) 4 billion
Eddie lampert as majority owner and Chairman???
Minimum of 14 billion, if you do not value the inventory liquidation simultaneously with the operating business.
subtract 2.5 billion in debt, and there is still:

lots of upside.

Jun 29 11:23 AM

[SamiC:]

and I forgot sears canada too,
add another billion to minimum 15

Jun 29 11:24 AM

[Thrift Maven:]

When Citi raised credit card rates on their former Sears Card to outrageous numbers, many of us closed our accounts.
American business is so corrupt. We have to act like decent citizens, even though we are not treated as such. Preserve cash. Force
deflation. Refuse hype.

Jul 02 10:18 AM

[sf123:]

Seperating Sears into a retial owner and a REIT would uncover the value in the real estate. The only trouble is that making the retail Sears paying a fair market rent would probably force it go bankrupt in a year or two.

Aug 04 11:19 PM

[jkrishna:]

General Growth properties, among other REITs, is covered in the Yahoo Finance article detailing the lodging industry and REITs:
finance.yahoo.com/news...

Aug 20 03:44 PM