The way Sears Holdings’ (SHLD, Financial) has started the creation of an extensive portfolio of real estate acquisitions, news of a joint venture comes as the next logical step in order to tap into the true value of their portfolio. Sears Holdings and Simon Property Inc. (SPG, Financial) have announced their joint venture on Monday.
As per the terms of the joint venture, Sears will contribute 10 properties located in Simon Property malls, which are Indianapolis based, to the partnership valued at $228 million. In return, Sears Holdings will get $114 million in cash and a 50% stake in the JV with Simon Property paying $114 million in cash to the newly formed Joint Venture and receiving the other 50% of stakes in the JV. In addition, Simon Properties will purchase a Sears Holdings property in McAllen, Texas, at the La Plaza mall.
Required company growth
Seritage Growth Properties, Sears Holdings’ real estate investment trust, will also acquire Sears’ 50% stake in the JV with Simon Property. The REIT will acquire the stake following the completion of its own offering of planned rights.
This agreement has an initial term of ten years, with the addition of two to five year renewal options that Sears Holdings will pay $13.4 million in initial base rent towards.
This is a huge step for Sears who are trying desperately to take advantage of their extensive real estate portfolio.
Why this move is so important
This move will allow Sears shareholders such as their CEO Edward Lampert (Trades, Portfolio) to purchase high valued company assets in an attempt to raise the necessary funds, after a series of losses that have rattled the company’s third party vendors and investors.
In a press release launch, Edward Lampert (Trades, Portfolio), chairman and CEO of Sears Holdings said, “We are pleased to reach this agreement with Simon Property Group, which is an important step in Sears Holdings' continued transformation to a membership company, without the significant asset intensity of its traditional retail business. This transaction, taken together with our other initiatives to create shareholder value through our vast real estate portfolio, enhances Sears Holdings' financial flexibility to invest in longer-term strategies such as our membership and integrated retail platforms. Sears Holdings will continue to operate these 10 stores and there will be minimal impact on their day-to-day operations or the overall shopping experience for our members.”
Steps going forward
Using its highly valued real estate portfolio, Sears Holdings Corp is trying to raise much-needed cash in the middle of its fourth consecutive year of losses. Sears announced on Monday it will be selling 10 properties worth a total of $228 million in the joint venture with America’s largest mall owner, Simon Property Group.
This is the second kind of deal for Sears this month. Earlier in the month, on April 1, Sears announced their transaction with General Growth Properties Inc. (GGP, Financial), which was America’s second-largest mall property developer. On the same day Sears declared it was making a real estate trust in Maryland that would be known as Seritage Growth Properties. In order to raise $2.5 billion, Sears would sell 254 properties to the venture.
On Monday, the stock market illustrated shares of Sears Holdings Corp rising to $43.55 by 1.45% post announcement of the deal. The company is expected to announce its year-end earnings on May 20.
Analysis
Currently, analysts are considering Sears Holdings Corp. a SELL category stock. Certain concerns drive this rating such as a declining cash flow, a low gross profit margin and continuously declining revenue. During the past fiscal year the company reported poor volatile EPS with analysts predicting high EPS growth in 2015. With its net income growth greatly exceeding that of the S&P 500, Sears Holdings Corp is poised to see a great year ahead. Hence despite analysts putting Sears Holdings in SELL category owing to the restructuring process we are bullish on the stock and suggest a BUY and HOLD rating until the beginning of 2016.
