Bruce Berkowitz (Trades, Portfolio)’s Fairholme Capital Management on Thursday disclosed a stake worth 13.2% of Sears’ newly formed and long-anticipated REIT, Seritage Growth Properties (SRG, Financial).
Berkowitz, Sears Holdings (SHLD, Financial)’s second largest shareholder, owns 3,252,750 Class A common shares of the company Sears formed in April to buy back 254 of its Sears and Kmart stores, which Sears planned to lease back and continue operating.
To partially fund the purchase, Seritage held a rights offering closing on July 6 for more than 53 million common shares, which generated $2.7 billion. It also planned to use the proceeds for joint ventures with Simon Property Group, General Growth Properties and The Macerich Company for 31 properties.
"We expect the creation of Seritage to enable us to accelerate many of the activities that we have been pursuing over the past several years to transform Sears Holdings into a leading integrated retail membership-focused company," Edward Lampert (Trades, Portfolio), Sears Holdings' chairman, CEO and largest shareholder, said in a statement.
"By separating a portion of Sears Holdings' real estate portfolio into a new, publicly traded company, and leasing back the space, we are substantially enhancing Sears Holdings' financial flexibility and significantly transforming our capital structure toward one that is more flexible, long-term oriented and less dependent on inventory and receivables. We expect to continue to operate most of our retail stores in each of the locations owned by Seritage and lease back the properties, just as we do at a large number of our locations."
Seritage offered the Fairholme Fund (Trades, Portfolio)s 9,527,198 Class C non-voting shares at a price of $29.58 in lieu of Class A common shares to help it get around REIT ownership rules that restrict ownership to 9.6% of the company. Fairholme was expected to exercise some of its rights as non-voting shares and to purchase common shares, according to the prospectus.
Fully exercising his subscription rights would give Fairholme more than 11.7% of the REIT, the company said.
Berkowitz has owned Sears stock for more than five years, and it was his third largest holding behind AIG (AIG, Financial) and Bank of America (BAC, Financial) at first quarter-end.
His only other retail stock, St. Joe (JOE, Financial), makes up 8.6% of his portfolio, which is 65.7% financial services.
Sears stock has fallen almost 33% since the beginning of the year, including a more than $10 dive since June. Shares closed at $22.15 on Friday.
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