Seritage Realty Trust’s homepage seeks to dazzle prospective tenants with illustrations of gleaming retail properties featuring landscaped parking lots filled with cars and shoppers. Seritage promises visitors “the locations you need in virtually every major U.S. market.”
It’s not immediately obvious that Seritage is connected to Sears Holdings Corp. (SHLD), the department-store chain struggling to attract shoppers and shake off a reputation for dilapidated locations. The 200-plus Sears and Kmart stores listed on the Seritage website are part of an effort by Chief Executive Officer Eddie Lampert to raise cash and turn around the Hoffman-Estates, Illinois-based company.
Lampert has presided over 27 straight quarters of falling revenue, forcing asset sales to shore up cash reserves that have shrunk by more than half since January 2011 to $599 million at the end of November. The Seritage branding may be an attempt to burnish Sears’s real estate, said Matt McGinley, managing director at International Strategy & Investments in New York.
“From a real estate standpoint, Seritage may seem to be a better brand than just saying, ‘Here’s a stodgy old Sears store,’” he said in a telephone interview. Analysts have valued the real estate portfolio at $4 billion to $7 billion.
Sears established Seritage in March as a separate legal entity with headquarters in Greenwich, Connecticut, Delaware incorporation records show. The unit is run by David Lukes, a former mall executive hired two years ago to the newly created role of president of real estate development.
Sears declined to say why the website doesn’t identify its parent. Another real estate website, set up before Seritage, makes clear that it belongs to the company.
“Sears Holdings’ strategy is to use the real estate we occupy productively,” Howard Riefs, a Sears spokesman, said in an e-mail. “That means generating enough profit from our operations and, if we can’t do that, deriving profit by using it in other ways.”
Analysts including McGinley speculate that Sears may be planning to spin off Seritage into a separately traded real estate investment trust. REITs generate at least three quarters of their income from rents or interest on mortgages financing real estate. They pay no corporate income tax in exchange for paying out 90 percent of taxable income to shareholders through dividends.
While setting up the separate entity could be a precursor to creating a separately traded REIT, “there’s not a whole lot of appetite” for a company with only one tenant in its portfolio, McGinley said. For example, mall operator General Growth Properties Inc. (GGP) has multiple tenants.
Hedge-fund manager Bill Ackman urged Target Corp.’s (TGT) shareholders to support such a spinoff in 2008, saying an offering would raise $5.1 billion. Shareholders defeated the proposal. Before liquidating in 2008, department-store chain Mervyn’s LLC separated its real estate portfolio into a REIT.
Asked if Sears planned to turn Seritage into a real estate investment trust, Riefs said no assets had been transferred to it, which companies typically do when creating a REIT. Lukes and Lampert were unavailable for comment, he said.
The website describes Seritage as a commercial real estate developer offering access to “mature suburban and urban markets.” It highlights redevelopment projects such as a 14-acre mixed-use site in St. Paul, Minnesota, and posts fliers for each property showing maps, pictures and key stats such as average auto traffic and available parking.
When Lampert merged Sears with Kmart in 2005, investors pushed the shares above $180, betting the hedge-fund manager was seeking to unlock value from the department-store chain’s property holdings.
Sears owns or occupies about 2 percent of U.S. retail space, a considerable portfolio because the market is very fragmented, said Cedrik Lachance, a managing director at Green Street Advisors, a real estate research firm. By contrast, Macy’s Inc. (M) controls about 1 percent, he said.
Lampert missed the opportunity to sell stores when the economy was stronger, McGinley said. The shares closed yesterday at $38.05 in New York, about a quarter of their value in the weeks after the merger. Sears rose 2.4 percent to $38.95 at 9:40 a.m.
“They should have really whacked the underperforming stores a long time ago,” said Dan Scouler, who runs Scouler & Co., a turnaround consulting firm based in Los Angeles. “They’re going to have a tougher time selling their assets at a reasonable price.”
Appraisals of Sears’s real estate portfolio vary widely. Baker Street Capital last year valued it at more than $7 billion. McGinley says Sears has already sold its best properties and says the portfolio is worth about $4 billion.
The year Lukes came on board, Sears sold 11 locations to General Growth Properties for about $270 million. In October, it announced the sale of five Sears Canada leases to Cadillac Fairview Corp. for C$400 million ($376 million).
The company has also sought tenants to rent parts of its stores, including a deal announced last month to sublease the second floor of its store in Pennsylvania’s King of Prussia mall to Dick’s Sporting Goods Inc. (DKS) Those properties weren’t part of Seritage. Another sublease for a Nordstrom Rack in Thousand Oaks, California, is scheduled to open next year.
Such deals, however, have been scarce, Lachance said, and tend to be in premium spots such as South Coast Plaza in Costa Mesa, California, where Sears sublet to Forever 21. Only 23 percent of the company’s Sears stores are located in so-called “A” malls where demand is highest, he said in a phone interview.
“The holy grail is to be able to repurpose the real estate in an orderly fashion, and in order to do that you need to be somewhat viable,” Lachance said. “It’s just not clear what’s the strategic vision in regards to its real estate.”
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