Sears' $2.5B REIT plan may be blueprint for deals

Sears Holdings Corp.'s plan to raise more than $2.5 billion from its real estate will serve as a blueprint for future deals, helping CEO officer Eddie Lampert deliver the financial returns he has long promised to investors.

A newly formed real estate investment trust (REIT), Seritage Growth Properties, will buy 254 Sears and Kmart locations and then lease them back to the retailer. As part of a plan announced Wednesday, Sears also will contribute 12 properties to a 50-50 joint venture with mall operator General Growth Properties Inc. in exchange for $165 million in cash.

Between them, the Sears and Kmart brands have more than three dozen stores, outlets, auto centers, and home/appliance centers in the Philadelphia region. General Growth Properties owns Neshaminy Mall in Bensalem and Christiana Mall in Newark, Del.

Though Sears Holdings 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. Share price surged 31 percent when the company announced in November that it was exploring the possibility.

"For mall 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, Calif.

REITs composed of a single retailer are rare because investors want to spread risk among multiple tenants. Yet investors could bite if they see the transaction as a way to wring more value from 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 Inc. chain and the Lands' End brand while working to transform the company into a leaner retailer, focused on generating sales online and from loyalty-program members.

Seritage will fund the purchase with debt and proceeds from a rights offering expected to close by the second quarter's end.

Green Street Advisors lists 131 of Sears' 628 mall stores in A, or top-quality, malls. Other landlords with Sears stores in A malls include Macerich Co. and Simon Property Group, Lachance said.

Simon counts King of Prussia, Philadelphia Mills, and Oxford Valley among its nine malls in this region. Macerich, which recently renovated Deptford Mall, said in July that it would invest $107 million in the Gallery at Market East in a joint venture with mall manager Pennsylvania Real Estate Investment Trust. That arrangement also requires an agreement with the City of Philadelphia.