Share |

Why New Brunswick’s Sears May Not Be a Likely “Closing Target”

Real Estate Mortgage Investment Conduit Offers a Glimpse Into Sears' Finances
DIeHard
Sears is looking at options for its DieHard and Kenmore brands, plus the Auto Centers busn. such as partnerships/joint ventures. Dave Schatz

NEW BRUNSWICK, NJ—Hub City's Sears department store is likely not among the company's locations targeted for closure, because the real estate it sits on is owned by Sears and serves as collateral for the company's pension fund.

The struggling Sears Holdings Corporation said it improved overall business performance during the last four months of 2016, according to a February 10 news release.

The company, which owns both Sears and Kmart, outlined moves designed to increase profitability and “enhance its liquidity [availability of cash] and financial flexibility.”

It also cited a restructuring program to “streamline operations” and reduce costs by as much as a billion a year.

"We significantly improved operating performance and made progress toward profitability in the fourth quarter of 2016,” said Edward S. Lampert, Chairman and Chief Executive Officer at Sears Holdings.

In the beginning of this year, said Lampert, “Transactions to optimize our capital structure and unlock value across Sears’ wide range of assets,” was taken.

“We intend to use net proceeds from our announced Craftsman and real estate transactions, as well as from improvements in the operating performance of the Company, to meaningfully reduce our outstanding obligations and their associated expenses.”

The CEO said the company will reduce its corporate overhead by further integrating Sears and Kmart operations while improving merchandising, supply chain and inventory management.

"We believe the actions outlined today will reduce our overall cash funding requirements and ensure that Sears Holdings becomes a more agile and competitive retailer with a clear path toward profitability.”

The company will also continue to evaluate options for its Kenmore and DieHard brands, Sears Home Services, and Sears Auto Centers business through partnerships or joint ventures, it said.

As progress, Lampert said the company closed a $72.5 million real estate deal on January 26 to sell five Sears full-line stores and two Sears Auto Centers, though no Sears stores in the Garden State are closing as a result of that deal.

While Sears was once a titan of retail in the United States, it now looks set to sink, said Neil Saunders, Managing Director of GlobalData Retail.

Sales figures have been “on the slide” for just over eleven years with no improvements in site, said Saunders, who noted that for more than a decade, sales have more than halved, dropping by almost $6.5 billion.

Once the largest retailer in the nation, Sears is monetizing its assets and selling off chunks of its business – it has a very large cushion of assets to fall back on – to fund daily operations, added Saunders.

Not only has the company sold off stores and real estate, but it’s selling brand assets as well.

Recently Sears sold the iconic Craftsman brand name for $775 million in cash to Stanley Black & Decker and will participate “in the externalization” of the brand by Black & Decker.

Sears also said it would be looking at its real estate portfolio to identify opportunities for “reconfiguration and reduction of capital obligations,” according to the release.

But the Hub City location on Route 1 South is probably not high on the list of closing targets for Sears, unless the store is not performing well, according to a contributor to the financial website "Seeking Alpha."

“The ownership situation for the New Brunswick store probably decreases the chance that it will close in the near-term,” said the person, whose pen name is “Elephant Analytics” on the website.

The location is owned by Sears Holdings via a bankruptcy-remote structure and appears on a list of stores involved in the Real Estate Mortgage Investment Conduit (REMIC) that Sears created 14 years ago.

“Basically one subsidiary of Sears Holdings owns the New Brunswick store and leases it to Sears,” said the person.

While the Hub City location is “technically leased, [it is] also owned by another part of the Sears Holdings corporate family,” he added.

There’s no incentive for Sears to shutter the New Brunswick store and save the rent, because the lease payments are not going to an outside party, explained the person.

Moreover, the REMIC properties are also collateral for Sears' underfunded pension, he said.

Five other Garden State Sears locations on the list of REMIC's, according to a Sears Holdings regulatory filing, include: Lawrenceville, Burlington, Mays Landing, Rockaway, and Livingston.

“In essence, through the securitization structure, the underlying assets indirectly serve as collateral for the obligations to our customers and employees,” reads a Sears document labeled "Reinsurance and Securitization Transactions."

"The real estate associated with 125 Full-line stores was contributed to indirect wholly owned subsidiaries of Sears, and then leased back to Sears,” the filing continues.

“The contributed stores were mortgaged and the REMIC issued to wholly owned subsidiaries of Sears … that are secured by the mortgages and collateral assignments of the store leases. Payments to the holders on the REMIC Securities are funded by the lease payments."

However, the Alpha contributor said he didn't think selling the real estate connected to the full-line stores would help Sears raise cash to keep it afloat.

“There isn't much reason for Sears to sell the New Brunswick store,” unless business there is very poor, he said.

In Woodbridge Center Mall, the Sears store is part of a General Growth Properties (GGP) Real Estate Investment Trust (REIT).

Given the arrangement, GGP rents or leases the retail space to Sears. According to a Credit Suisse document, the lease was set to expire this past August, but the store remains open.

Simon Property Group (SPG), which operates five malls or shopping centers in New Jersey that are home to Sears stores, also has a joint venture with Sears.

For instance, in a deal a couple years back, Sears received $114 million in exchange for ten of its properties.

Seritage Growth Properties, formed in 2015, is a publicly traded, self-managed REIT engaged in the acquisition, ownership, development, redevelopment, and leasing of retail real estate assets.

Including the projected revenue from signed leases associated with re-development projects, Sears and K-Mart leases account for nearly 70% of Seritage revenue, according to the REIT.

The Sears stores in Freehold, Wayne, Toms River, Paramus and Watchung, are also owned by Seritage.

“Pursuant to a master lease, 224 of [Seritage's] wholly-owned properties are leased to Sears Holdings and are operated under either the Sears or K-Mart brand. Third parties under direct leases also occupy a portion of the overall leasable space alongside Sears and Kmart,” reads a Seritage filing.

The document says that Seritage also has 50% interests in 31 additional properties through "joint venture investments" with General Growth Properties (12 properties), Simon Property Group (10 properties), and Macerich (nine properties) that are also master leased to Sears Holdings.

“The master lease provides Seritage with rights to recapture certain space from Sears Holdings at each property,” reads the filing.

Speaking during SPG’s third-quarter earnings call October 26, 2016, Simon Property Group's Chairman & Chief Executive Officer David Simon told executives, "If we want to just talk about leasing a Sears-box that we get back, I mean, that’s okay for some companies but that’s not what we’re about,” according to a Seeking Alpha transcript.

“It’s not going to take away from what we’re doing, my number one priority is to make our [malls and shopping centers] better any way that we can, technology digital investments look and feel, better retailers, different mix, redevelopment, however that transpires,” said Simon.

Saunders said he expects more store closures down the pike unrelated to the fact that both Sears and Kmart have several leases set to expire over the next five years.

“These closures, especially on the Sears Domestic side, will bring a glut of retail space onto the market and could, potentially, damage the prospects for some malls,” he said.

“Others may fare better if they can replace the space, or at least part of the space, with more productive retailers. However, we see the former as the more likely outcome for most locations.”

But the CEO of the country’s largest mall operator says his company is prepared and already looking at the "upside."

“We did an analysis, I won't name a name, but a well-known retailer, big retailer. I think we have 30 leases with them, and given where [how low] their rents are, we felt like we would only have to lease four boxes, four out of the thirty, to replicate the income stream," said Simon on SPG’s fourth-quarter earnings call on Jan 31.

"That's the opportunity. So you've got 30 leases, but they were done a gazillion years ago, and the quick and dirty analysis that we had is we had to lease four [stores] to replicate that income stream," Simon continued.

"So the rest of the 26 or thereabouts... it gives you the order of magnitude, that's exactly kind of the potential upside that we have, and now if in fact we get those leases back, we're going to have more product available, but we're also going to have, I think, great opportunities to increase our income stream.”