More On Sears' Real Estate

| About: Sears Holdings (SHLD)

Much has been written about Sears (NASDAQ:SHLD) and its CRE holdings. I like to boil things down to their most basic as less gets lost in the minutia. A reader sent this to me and after going through the math, it look sound. Remember when you read this that Sears in its entirety is now only worth $4.7B and remember this quote:

Sandeep Lakhmi Mathrani - Chief Executive Officer and Director - GGP

And one last comment is we don't anticipate there should be any meaningful supply in the mall space. We may see a handful of malls being built in the next decade.

Where is General Growth Partners (NYSE:GGP) going to get growth from? We've already seem Simon Property (NYSE:SPG) spinning off assets to shareholders in order to fuel returns for them (GGP did this when it spun off ROuse Properties (NYSE:RSE)). GGP has spent the last couple years fixing operations post Chapter 11 but once this is done, where do they go for growth? New malls are not being developed and those who own good Class A Regional malls are not selling. Further, there is only so much existing structures can do to create shareholder value. The only legitimate place for them to go to acquire more CRE is SHLD. You will notice on last year's 10K page 18 of the 126 malls listed by GGP, Sears is an anchor in almost all of them (the 126 number includes JV interests of GGP).

It isn't an outrageous proposition as the two already did this last year.

From a Reader (How Sears got this property):

"By 1971, Homart was operating nine regional shopping locations, and had numerous others in development. It became the nation's second largest mall developer, and by 1992 it was reported that Homart had developed 80 malls with over 75,000,000 square feet (7,000,000 m2) of retail space. By 1994, it was also operating 36 of those developed malls.

"In November 1994, Sears announced that it planned to sell off Homart as part of a restructuring. General Growth Properties completed an acquisition of Homart in late 1995 in a transaction valued at $1.85 billion, then one of the biggest real estate deals in history. Homart also owned a number of office buildings which were also sold in 1995."

Sears owns a huge amount of space in GGP malls: an anchor in 87 of them, accounting for over 12 million square feet, virtually all of which is owned.

Consider that Sears isn't listed as one of GGP's top 10 tenants (because virtually nothing is leased); yet the 10th largest tenant, Genesco (the owner of Journey's and Lids) only leases 500,000 square feet.

Buying all of Sears is effectively buying a 20% interest in GGP alone, given the owned space and respective stock valuations. That's why I say it's like an arbitrage. This doesn't include any other assets, operating businesses, or space in other malls like Simon.

What's a 20% interest in GGP worth? - $3.7 billion at today's price.

Note, this ignores SHLD space in SPG malls of which Sears has a presence in ~130 of them. The above holds true for SPG. The easiest way for them to acquire more CRE to develop is to simply buy the Sears locations in the malls.

I think this is what Berkowitz was referring to when he spoke of Sears RE.

The argument is then that kills the retail side of Sears. To the contrary I think it frees it. It frees its major brands Craftsmen, Kenmore and Diehard to be sold in every Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) across the US. Those brands are already set up to license the products so to start this would involve minimal time and energy. Land's End is already in the process of being spun so that brand one can argue will do better outside of Sears vs. trapped inside the retail operations of it.

In this scenario you have a huge capital infusion to Lampert/Berkowitz, a massive cost deleveraging and an asset light model with some of the most recognized brands in their prospective fields.

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