Winter 2015 Issue
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Volume 17, Issue 2 Winter, 2015 The Sears Holdings Saga Continues into the Holiday Season— Will a Grinch or a Santa Claus Be in Sears Future? Sears Holdings has been in the Congress created REITs decades at least 90 percent as dividends. headlines more than usual dur- ago as a way to let ordinary Ameri- Companies have created REITs to ing the past month—some good cans buy shares in skyscrapers, lower taxes and boost returns to news, some not so good news. For shopping malls, and office build- their shareholders. example, there were headlines such The REIT spinoff would provide as: “Sears Holdings Considers REIT Sears with additional cash. Assum- to Raise Cash.” “Sears Stock Sky- ing an average of $56 a square foot, rockets on Real-Estate Potential,” analysts at Evercore ISI estimate “For Lampert, a Big Step to Tap the Sears REIT might be worth Sears Real Estate,” “Would a REIT $1.9 billion. And Sears might see Actually Help Sears?” “Sears Still $1.4 billion of that, which would Can’t Call Itself a Store of Value,” be enough to fund operations for “The Incredible Shrinking Sears,” another year at the rate it is burn- “Sears: The Death Spiral Contin- ing cash. But the REIT’s real worth ues,” “Department Stores Far from won’t be known until the stores are Dead Despite Sears’ Disaster,” graded and valued. “Sears Is in a Hole it Cannot Get Out Of.” Sears Stock Soars When Sears announced on Novem- The company has been closing ber 7 that it was considering selling stores, slashing inventory and upwards of 300 of its buildings to selling off assets to generate cash after nearly a decade of falling CEO Eddie Grinch This issue of STRAIGHT TALK: sales and dwindling margins. Last SHC Saga Continues p. 1 October Sears sold its full-line ings just as they could buy stock in Lowe’s Tops Sears? p. 4 store in Cupertino, California, for a company or mutual fund. Life Insurance Alert p. 5 $102.5 million. The basic rules are relatively sim- Syracuse Retiree Club p. 6 A lot has been written about Sears ple. REITs have to have most of Obituaries p. 8 Holdings wanting to set up a Real their assets and income tied to Chairman’s Page p. 9 Estate Investment Trust, or REIT, real estate, and they pay no tax on Former Great Merchants p.10 that will involve around 300 Sears income distributed to their share- SHC Gets Perfect Score p.12 stores. Exactly what is a REIT? holders as long as they pay out Esplanade at Aventura p.12 —STRAIGHT TALK Winter 2015— 1 boost its liquidity and forming a man Lampert and ESL Investments Cerberus Capital Management, REIT that would hold the stores, since they are the largest share- Sun Capital Partners and Lubert- the company’s stock jumped more holders in the company. Adler. These three firms stripped than 31 percent. the 59-year retailer of its assets and Financial analyst Brian Sozzi, separated its real estate portfolio As reported in the Chicago Sun- calculated that Sears lost close to into a REIT. Times on November 10, “The another $500 million for the most company (Sears), which was once recent quarter. So, as a result of a On October 17, 2008, the company a staple of American shopping is REIT, is the solution to have Sears’ announced that it would liquidate facing pressure from nimbler ri- best store locations pay rent each its assets through a Chapter 7 vals such as Wal-Mart Stores and month? What that would do is to bankruptcy filing. Thirty thousand Home Depot. It’s also dealing with provide cash-strapped Sears with people were put out of work. broader industry issues, includ- significant cash injection in an Mervyns’ collapse reveals danger- ing a slow economic recovery and attempt to buy more time to turn ous flaws in the private equity shoppers who are taking their dol- things around. playbook. It shows how investors lars elsewhere.” Even a REIT comprised entirely of with risky business plans, unre- While Sears’ stock skyrocketed the best remaining 200 to 300 re- alistic financial assumptions and for one day, the company reported tail locations (under master lease competing agendas can deliver a that it expects third-quarter sales agreements with Sears) might not death blow to companies that oth- to dip 0.1 percent at established be popular on Wall Street due to erwise could have survived. locations. An expected 0.7 percent the company’s junk credit rating, Mervyns’ new owners were eager to decline at Sears stores offset a 0.5 declining sales and consistently turn the company’s real estate into percent increase at Kmart stores. huge losses. gold. When the acquisition closed, Last August, Sears reported its The lease payments from Sears they split the company into two ninth straight quarterly loss as Holdings to the REIT would most main pieces—the retail operation sales continued to slide. likely exacerbate the company’s and a much more valuable entity As The Wall Street Journal recently negative cash flow by the amount of that held the real estate. reported, while Sears’ “latest round contract rent on the master leases. Over time the owners would shut of imaginative financial engineer- In addition, the new REIT manage- down 90 underperforming stores ing (has offered the company) a ment and Sears Holdings would and close two of its four distribu- reprieve, (it) doesn’t solve its funda- likely have conflicting interests and tion centers in order to sell some of mental problems of unprofitability.” vision for the real estate assets. the land they owned. They also sold Would a REIT Help Sears? According to Benzinga, in the event the decades-old property leases on Maybe yes. Maybe no. Can a REIT of a Sears bankruptcy, all bets are many other stores to outside com- strategy really rescue Sears Hold- off, as a messy situation rife with panies—and then turned around ings or is this just another spike on potential conflicts of interest could and rented the property back at real-estate related news destined to unfold over several years. current market rates. The owners collapse under a pile of operating kept the proceeds from the land and Target and Mervyns losses, as reported by Benzinga’s lease sales for themselves. In 2008 hedge-fund manager Bill Stoller. (Benzinga is an inno- Bill Ackman urged Target Corp.’s The Mervyns demise offers a sad vative financial media outlet that shareholders to spin off the com- glimpse into the human suffering provides investors with unique pany’s real estate, valuing such a wrought by owners looking to turn content used by Wall Street’s move at $5.1 billion. Investors voted a quick profit above all else top traders.) down the proposal. Shareholder Advantages As a result of the one-day Sears Mervyns, the middle-scale de- As unattractive as a REIT may stock soar on November 7 that partment store chain based in sound, there could be some resulted in an increase in equity Hayward, California, and originally advantages for existing Sears capitalization of about $1.08 billion, owned by Target, was taken over by it was a very good day for Chair- three private equity titans in 2004: —STRAIGHT TALK Winter 2015— 2 shareholders. Benzinga suggests nication colocation properties. It Analysts at Credit Suisse said three such advantages: has a massive real estate portfolio. that Sears Holdings would likely put its best performing stores into 1. Assuming the leases are struc- In summary, the key to adding the REIT, which would need to be tured so the REIT would have tangible value for Sears’ sharehold- strong enough to stand on its own. taxable income, at least 90 per- ers from a REIT strategy can only Sears said it would lease the stores cent of it must be paid out in the come from a “block and tackle” ef- back from the REIT and continue form of dividends to sharehold- fort, and a vision to transform the to operate them. ers—not squandered on failing bottom 1,500 locations, not from retail operations monetizing the top 300, according Credit Suisse analyst Gary Bal- to Benzinga. ter said that by playing the REIT 2. There is a chance these real card, Sears is using what the bulls estate assets could be “walled Credit Ratings on the stock have long argued is off” from Sears’ creditors, in a At Sears, things are bad enough the real value in the company, its similar fashion to the U.S. rights that Fitch lowered its debt rating “real testate.” to valuable brands like Kenmore, from CCC to CC last September. A Diehard and Craftsman, which CC rating indicates highly vulner- Sears said that the REIT deal would are held in a separate entity. able, very speculative bonds. With produce substantial infusion of such a rating it is both difficult and cash. Analysts, however, are skepti- 3. The new REIT management may expensive for Sears to continue to cal that the company can continue be more focused and have more borrow money to pay its creditors to raise the funds it needs un- success in maximizing long-term less its operations turn property values around. Fitch Ratings than current concluded in an analy- stalled initia- sis earlier this year tives of Seritage that the company could and Ubiquity likely only raise enough Critical Envi- money to last through ronments. 2016 if it doesn’t stop You may recall bleeding cash. that Seritage is A spinoff would capital- Sears’ secret re- ize on the most valuable alty trust.