SHLDQ - Sears Holdings Corp

[Guest wellmont]

the general partner holds the option. It wouldn't make a lot of sense for limited partners to be able to dictate how general partner manages the assets. that could be disruptive. Let's be logical. Why do they want to redeem? because most of the fund is in shld and they want no part of it. This is why they are letting go of these shares like they're hot potatoes.

[merkhet]

FWIW, I think it's pretty clear that the redeeming LPs have been dumping the stock on the open market -- what's unclear is who has been buying the shares from them...

[Guest wellmont]

 

I was aware of that article from two years ago. Is there anything current that shows that Sears is close to going off the rails with creditors?

 

After all, Eddie was shooting for $500 million in liquidity and he hit $2 billion.  That's a pretty big "overshoot."

 

No. Because eddie has been raising cash. Think of it this way. He is burning the furniture to heat the house. Note when eddie started raising cash in 2012. It was in direct response to these concerns in 2011. Eddie was forced into this strategy because of dismal retail performance. It's also why he shutdown the stock repurchase program.

 

[tombgrt]

FWIW, I think it's pretty clear that the redeeming LPs have been dumping the stock on the open market -- what's unclear is who has been buying the shares from them...

 

What are you saying? Someone has to buy the shares that are being sold. That can be anyone.

 

 

Good to see wellmont giving some resistance... Lately most bullish comments here made little sense imo.

[Guest wellmont]

FWIW, I think it's pretty clear that the redeeming LPs have been dumping the stock on the open market -- what's unclear is who has been buying the shares from them...

 

people like bb. hardcore value investors. true believers. don't forget the shares today include 3 possible events. 1 the spin off or sale of Lands End. 2 the sale of the auto service business. 3 the sale of Sears Canada. The stock will probably stay above $45 imo. The reason is that Eddie is finally doing "stuff".

[merkhet]

 

 

I was aware of that article from two years ago. Is there anything current that shows that Sears is close to going off the rails with creditors?

 

After all, Eddie was shooting for $500 million in liquidity and he hit $2 billion.  That's a pretty big "overshoot."

 

 

No. Because eddie has been raising cash. Think of it this way. He is burning the furniture to heat the house. Note when eddie started raising cash in 2012. It was in direct response to these concerns in 2011. Eddie was forced into this strategy because of dismal retail performance. It's also why he shutdown the stock repurchase program.

 

 

Gotcha -- so I'm still fairly curious as to why Eddie has overshot his goal by $1.5 billion. It's a rather large amount to overshoot given that there aren't any current vendor issues.

 

 

What are you saying? Someone has to buy the shares that are being sold. Shares drop because no one wants them at a higher price currently or they don't have enough buying power to move the stock upwards.

 

 

I'm saying that I'd like to see who is increasing their positions in Sears right now.

 

These shares are dropping because when you dump 3 million shares a day into a market that trades only 800,000 a day, then you're going to move the stock down substantially.  There are both sizing and pricing issues all at the same time...

[Luke 532]

Good lively discussion on the ESL distribution.  I think it's more-or-less a non-event.

 

To change gears a bit, curious if anyone has thoughts on Seritage's progress?

 

http://online.wsj.com/article/PR-CO-20131203-909242.html?dsk=y

[Guest wellmont]

Gotcha -- so I'm still fairly curious as to why Eddie has overshot his goal by $1.5 billion. It's a rather large amount to overshoot given that there aren't any current vendor issues.

 

Perhaps the losses are far greater in the retail operations than was contemplated when he made that original goal. Second, the capital markets have been very receptive to sellers of assets. I will note that some of his bonds still trade at distress levels. and the perception that this company is failing has not changed. not much has changed here except the stock has bounced off of multi years lows a bit, a direct result of corporate actions and not improved performance from operating businesses. I don't think he would again contemplate a share repurchase program unless his retail operations became profitable. Or he went into full on liquidation mode. I don't see either option at the moment.

[txlaw]

the general partner holds the option. It wouldn't make a lot of sense for limited partners to be able to dictate how general partner manages the assets. that could be disruptive. Let's be logical. Why do they want to redeem? because most of the fund is in shld and they want no part of it. This is why they are letting go of these shares like they're hot potatoes.

 

Well, I don't really know how the mechanics of all this works.  As I understand it, when BPL was being wound down, WEB gave his LPs the option of receiving their proportionate shares in the fund as either cash distributions or stock distributions.  So it's not inconceivable that Lampert has given his LPs the option of choosing how they receive their redemptions -- though I have not heard anything on ESL winding down at this point.  Also, I'm not sure why any sophisticated LP would sign up with a GP who could simply choose to distribute overvalued stock to them in place of cash when redeeming their partnership interests, which would force them to take the extra step of immediately liquidating their stock distribution.

 

So lets assume that the LPs had the option to redeem their partnership interests in either cash distributions or SHLD stock.  Which I understand may not be the case, according to your (personal?) knowledge of how these partnership agreements are structured. 

 

However, if this were the case, would these LPs be required to pay taxes on their redemptions delivered in SHLD stock if they simply held onto the stock?  If not, then that is at least one reason why any LPs who believe in the SHLD thesis might elect to redeem their partnership interests in SHLD stock.  But the more likely explanation would be that these LPs want to keep some their SHLD exposure but do not want to increase their exposure to SHLD -- in which case they would ask for stock redemptions in order to sell off some of their SHLD position (I agree that the redemptions are likely about controlling exposure to SHLD).

 

As to whether these LPs are "dumping" stock, I have no idea if that's the case.  It could just be that investors are placing a lot more short bets based on these redemptions.  But I'll leave that analysis to people who understand how the market mechanics work.

[Guest wellmont]

Redemption in kind seems to be common. Below is from Warren't Buffett's favorite mutual fund. It seems you're going down an extremely low probability path with your hypothtical. There may be tax implications for why ESL chose to redeem his investors in this way. Even if Esl gave his investors a choice, something I believe is very low probability,  there isn't much difference in the overall implications of this decision. It still means that he was 100% okay giving up control of a large # of shld shares.

 

Payment of Redemption Requests

• Unless otherwise prohibited by law, the Fund may pay the redemption price to you in cash or in portfolio

securities, or partly in cash and partly in portfolio securities.

• The Fund has adopted a policy under which the Fund may limit cash payments in connection with

redemption requests to $250,000 during any ninety (90) day period. As a result, the Fund may pay you in

securities or partly in securities if the amount of Fund shares that you redeem is more than $250,000.

• It is highly likely that the Fund will pay you in securities or partly in securities if you make a redemption (or

series of redemptions) in the amount of $250,000 or greater.

[txlaw]

I believe redemption in kind is common. this is from Warren't Buffett's favorite mutual fund. I believe you're going down an extremely low probability path with your hypothtical. There may be tax implications for why ESL chose to redeem his investors in this way. Even if Esl gave his investors a choice, something I believe is very low probability,  there isn't much difference in the overall implications of this decision. it still means that he was 100% okay giving up control of a large # of shld shares.

 

Payment of Redemption Requests

• Unless otherwise prohibited by law, the Fund may pay the redemption price to you in cash or in portfolio

securities, or partly in cash and partly in portfolio securities.

• The Fund has adopted a policy under which the Fund may limit cash payments in connection with

redemption requests to $250,000 during any ninety (90) day period. As a result, the Fund may pay you in

securities or partly in securities if the amount of Fund shares that you redeem is more than $250,000.

• It is highly likely that the Fund will pay you in securities or partly in securities if you make a redemption (or

series of redemptions) in the amount of $250,000 or greater.

 

It's entirely possible that it is a low probability path.  As I said, I don't know how these hedge fund arrangements work.  I'm not so sure it's a high probability that ESL gets to unilaterally choose what securities to distribute to redeeming partners.  But, again, hard to say without understanding more about how the funds have been set up.

 

Is that from the Sequoia Fund?  Can they pick and choose which securities to distribute for redemptions, or would there have to be a proportionate distribution of securities?

 

And does anybody know the tax consequences of receiving a distribution of securities in lieu of cash?  Seems like it could get complicated.

[Matson125]

Distributions of shares rather than cash would be made to redeeming partners in the event that the existing partners would be negatively affected.

 

If there was gains on the shares that were distributed (let's assume there was) and ESL sold them in the open market or bought them personally from the LPs there would be a tax liability from that gain at year end. The remaining partners would be responsible for the taxes payable.  By making a distribution in kind, if the LP decides to sell them on their own they are responsible for the taxes payable.

 

There has been a comparison to a similar transaction ESL did a year or so ago, where an LP redeemed and Eddie bought the shares directly.  The LP that redeemed was only 1 client in a vehicle that was set up just for them if I can recall.  To me these transactions are different as it seems multiple partners have redeemed.

 

[Luke 532]

To me these transactions are different as it seems multiple partners have redeemed.

 

I hope more partners continue to exit.  The closer we get to zero partners, the closer (and more likely) Lampert is to making SHLD his permanent investment vehicle.

[fareastwarriors]

more of a rehash.

 

 

http://www.bloomberg.com/news/2013-12-04/lampert-cuts-sears-stake-below-50-to-meet-redemptions.html

 

Lampert Cuts Sears Stake Below 50% to Meet Redemptions

[FCharlie]

When will I ever learn to sell some of the gains into the market well if it goes to 40 again maybe this time I will buy some leaps as I lost out last time :D

 

This is why you should sell calls. I've been selling $50-$60 strike SHLD calls for years. Heck, use the premiums and buy more shares. Why not? The premiums are outrageous.

[alertmeipp]

soon, this will turn into a tax loss selling candidate.  :'(

[FCharlie]

If you look at 13F filings from Eddie Lampert, he's obviously selling every single position that isn't Sears.

 

I don't know why this distribution of shares is viewed so negatively. If Eddie winds everything down, then logically, every single position will either be sold or distributed. In this case, he's distributing SHLD shares. Had he sold them into the open market, then I would be worried. Instead, he's selling everything else. Gap, AutoZone, Safeway, Big Lots, AutoNation, Capital One, Genworth Financial, CIT, Avon, IStar Financial, Seagate.... Every single one of those is gone except Gap and AutoNation and Eddie is actively selling those down.

 

So, what's the problem Mr. Market?

 

http://www.sec.gov/Archives/edgar/data/860585/000119312512355715/d397341d13fhr.txt

 

http://www.sec.gov/Archives/edgar/data/860585/000119312512470765/d439244d13fhr.txt

 

http://www.sec.gov/Archives/edgar/data/860585/000119312513060096/d485528d13fhr.txt

 

http://www.sec.gov/Archives/edgar/data/860585/000119312513222448/d539290d13fhr.txt

 

http://www.sec.gov/Archives/edgar/data/860585/000095012313006834/xslForm13F_X01/form13fInfoTable.xml

 

http://www.sec.gov/Archives/edgar/data/860585/000095012313009758/xslForm13F_X01/form13fInfoTable.xml

[Parsad]

You guys and the media are reading way too much into this.  He sold for redemptions...simple.  There are investors that are tired of waiting and wanted out.  It doesn't change anything...whether you are long or short.  Cheers!

[krazeenyc]

You guys and the media are reading way too much into this.  He sold for redemptions...simple.  There are investors that are tired of waiting and wanted out.  It doesn't change anything...whether you are long or short.  Cheers!

 

For the short term trader, though, I think it's got to be relevant right?  Taking 7 million shares that were thought to be essentially locked up -- and now creates 7 million shares that could be sold in the coming weeks is certainly a negative (at least in the short term). 

 

[merkhet]

http://www.bloomberg.com/news/2013-12-05/lampert-s-clients-pull-money-unimpressed-by-sears-rally.html?cmpid=yhoo

 

Some numbers re ESL.

 

 

Concentrated Bets

 

ESL Investments Inc., the Bay Harbor, Florida-based money-management firm that Lampert founded in 1988 after working on the merger-arbitrage desk of Goldman Sachs Group Inc. under Robert Rubin, takes concentrated stakes in publicly traded companies.

 

"As of Sept. 30, RBS Partners LP, the vehicle used to run Lampert’s hedge fund, held four U.S.-traded stocks with a total market value of $3.5 billion -- $2 billion of Sears shares; a $1 billion stake in AutoNation; a $265 million position in clothing retailer Gap Inc.; and a $184 million bet on Sears Hometown and Outlet Stores Inc., according to a Form 13F filed with the U.S. Securities and Exchange Commission last month.

 

Lampert’s U.S.-traded stock holdings, as reported in quarterly filings with the U.S. Securities and Exchange Commission, have gained 30 percent this year. More than half of the gain, or 17 percentage points, has come from Sears, according to data compiled by Bloomberg. The investments had risen an estimated 41 percent through November, before the three-day slump in Sears. The returns don’t include leverage, fees and holdings other than U.S. stocks.

 

ESL’s Returns

 

ESL Partners produced average annual gains of 25 percent for the first 14 years, before returns became more volatile. The fund declined 27 percent in 2007 and 33 percent in 2008, then rebounded with gains of 55 percent in 2009 and 16 percent in 2010, two people familiar have said. ESL Partners fell 4 percent in the first nine months of 2011, these people said, requesting anonymity because the information was confidential.

 

Lipin, the spokesman, declined to provide more recent returns and redemption figures.

One reason for the fund’s decline in those years was its investment in Sears, whose shares have declined 70 percent to $50.92 from their peak of $169.82 in April 2007. In 2012, the same year that ESL Partners reported it had received redemption requests, filings with the SEC show that the fund’s gross assets declined 24 percent to $5.1 billion while the number of investors in the fund shrank to 164 from 250.

 

 

http://www.dataroma.com/m/hist/p_hist.php?f=EL

 

At the end of Q4 2012, it shows that the funds had around $3.84 billion in securities, so then that's likely $1.3 billion in cash in the fund as of the end of 2012.  I wonder how much he's used to fund redemptions this year and how much is left in the fund.

[Luke 532]

http://www.peridotcapitalist.com/2013/12/cracks-begin-form-baker-street-capital-bullish-thesis-sears-holdings.html

 

First, the author attempts to negate the entire Sears Holdings real estate thesis by picking property from Sears Canada.  Perhaps Baker Street over-estimated the Canada properties?  Regardless, when I look at Sears I look at the real estate that Sears Holdings owns, anything in addition to that (like the large stake in Sears Canada), is just gravy.

 

Second, paraphrased "he was buying around $40 but didn't think the stock was nearly as cheap at $60."  Ummm, yeah?  Neither do I!  I'm glad the owner/operator of one of my largest holdings has the sense to think something is a better buy at $40 than $60  :)  The author is trying to get into the head of Lampert which I think can be very difficult.  He didn't sell any of his personal shares, which I think is key.  If I was giving shares to partners who wanted to sell, to the tune of 7M shares, I probably wouldn't rush out to buy them myself.  I would likely wait a little while and see if the price drops. 

[Luke 532]

http://www.peridotcapitalist.com/2013/09/sears-holdings-transformation-picks-steam-will-still-take-years.html

 

If you ask me, Sears should go the real estate route. It may take a long time, but shareholders should see some tangible benefits over time. Consider Seritage Realty Trust, the new company within Sears that holds 200 properties (or about 10% of the total). According to the Seritage web site, those properties control about 18 million square feet of space. Let’s assume they are redeveloped and can generate $30 per square foot, on average. That equates to $540 million of annual net operating income. If Seritage was IPO’d it could be worth about $8 billion (at a 7% cap rate). That is why Sears shareholders have a margin of safety in the stock and why it is not going bankrupt.

 

And how many times have you heard the media mention Seritage?  How many people even know it exists?  To be conservative, cut that $8B estimate in half to $4B and you're still looking at 75% of the entire market cap of SHLD (or ~$37/share) tucked away in one subsidiary, based on SHLD's market cap today of $5.3B ($50 * 106.5M shares).

[nestorius]

Here's a contrarian view...

 

$30/sqft rent is a big number for a department store and particularly SHLD. A reasonable rent coverage that a REIT investor would look for is 2x 4-wall EBITDAR. I estimate SHLD in its present form is generating $12/sqft in 4-wall EBITDAR (EBITDA+R+advertising exp) which suggests $6/sqft NOI. The typical North American department stores can do $200/sqft in revenue at maybe a 20% 4-wall margin, for $40/sqft EBITDAR and $20/sqft NOI.

 

The unlevered cap rate on a triple net basis for a captive single-tenant REIT would likely be closer to 8 or even 9% on IPO. REIT cash flows would be standing behind the creditors of SHLD who are charging 8.5% to 2018.

 

On a 8% cap rate value is $6 x 18m / 8% = $1.35bn.

[Luke 532]

Here's a contrarian view...

 

$30/sqft rent is a big number for a department store and particularly SHLD. A reasonable rent coverage that a REIT investor would look for is 2x 4-wall EBITDAR. I estimate SHLD in its present form is generating $12/sqft in 4-wall EBITDAR (EBITDA+R+advertising exp) which suggests $6/sqft NOI. The typical North American department stores can do $200/sqft in revenue at maybe a 20% 4-wall margin, for $40/sqft EBITDAR and $20/sqft NOI.

 

The unlevered cap rate on a triple net basis for a captive single-tenant REIT would likely be closer to 8 or even 9% on IPO. REIT cash flows would be standing behind the creditors of SHLD who are charging 8.5% to 2018.

 

On a 8% cap rate value is $6 x 18m / 8% = $1.35bn.

 

I wouldn't assume that all of Seritage's business would be done with other department stores, although the most recent deal was with Nordstrom's.

[merkhet]

 

Here's a contrarian view...

 

$30/sqft rent is a big number for a department store and particularly SHLD. A reasonable rent coverage that a REIT investor would look for is 2x 4-wall EBITDAR. I estimate SHLD in its present form is generating $12/sqft in 4-wall EBITDAR (EBITDA+R+advertising exp) which suggests $6/sqft NOI. The typical North American department stores can do $200/sqft in revenue at maybe a 20% 4-wall margin, for $40/sqft EBITDAR and $20/sqft NOI.

 

The unlevered cap rate on a triple net basis for a captive single-tenant REIT would likely be closer to 8 or even 9% on IPO. REIT cash flows would be standing behind the creditors of SHLD who are charging 8.5% to 2018.

 

On a 8% cap rate value is $6 x 18m / 8% = $1.35bn.

 

 

You guys may be talking past one another. I think that the author meant redevelopments including both leases to other department stores and redevelopment into commercial office building space. So, on average, they'd get to $30 per square feet. FWIW, I don't think that the office building redevelopments are being run out of Seritage, but I may be mistaken.