SHLDQ - Sears Holdings Corp

[TwoCitiesCapital]

I also noticed the increase in store closure rates over the last few weeks.

 

I floated an idea a few weeks ago to a few people (offline) that since the leases seem to have 5 year renewal rates, it would take 5 years for ESL to slough off the stores that weren't productive anymore. (And he seems to have started in 2012.)

 

It will be interesting to see where we stand in February -- agreed.

 

I recall reading that a signifcant number of stores had leases that expire in 2016. It was my understanding that year would probably be the game changer for those with the real estate thesis.

[Luke 532]

I also noticed the increase in store closure rates over the last few weeks.

 

I floated an idea a few weeks ago to a few people (offline) that since the leases seem to have 5 year renewal rates, it would take 5 years for ESL to slough off the stores that weren't productive anymore. (And he seems to have started in 2012.)

 

It will be interesting to see where we stand in February -- agreed.

 

I recall reading that a signifcant number of stores had leases that expire in 2016. It was my understanding that year would probably be the game changer for those with the real estate thesis.

 

Might be earlier than that as they're closing some stores early.  Per Chad...

 

Many of these leases are not even close to ending soon (they left a local Sears here in Seattle 18 months before the lease ended).

[krazeenyc]

Further, as we continue our transformation leveraging Shop Your Way® and Integrated Retail we believe that we have options that will allow us to highlight our significant real estate value and crystallize how we intend to transition away from an asset intensive, historically “store-only” based retailer to an asset light, integrated membership-focused company.

 

I interpret this language like so.

 

We have options to:

 

(1) Highlight our significant real estate value, and

 

(2) Crystallize (i.e., make clear) how we intend to transition away from store-based retail to asset-light, integrated retail (transform ourselves)

 

I don't believe the CFO is referring to any actions to monetize or spin off real estate, unfortunately.

 

I think this is going to prove to be correct. They will highlight the real estate value by borrowing against it (just like $400M for 25 stores did already) and probably disclose more about their SYW plan. Think about all of those slides they published showing how they think a successful SYW could positively impact the financials. Get ready for more slide decks and prerecorded conference calls! Spinning off real estate now, when liquidity is such an issue, doesn't make a lot of sense since it's providing cash flow.

 

On another note, has anyone else noticed that over the last week or so the number of store closing announcements has ramped up tremendously? There was that huge surge early in the year, then it slowed, and now it seems a ton of stores are set to be closing in December. And whereas it was mostly Kmarts earlier in 2014, now we are seeing a lot more of the leased Sears stores being liquidated. Many of these leases are not even close to ending soon (they left a local Sears here in Seattle 18 months before the lease ended).

 

It would be my guess that since the financials are so bad, and Q3 is typically the worst quarter of the year in terms of cash burn, that we are well on our way to getting down to a core of their 675 owned stores. Sure there will be valuable mall-based leased Sears stores that stay open and/or bring in co-tenants, but money-losing leased locations are coming to an end, FINALLY.

 

One more point I think is important. Q3 is going to be terrible in terms of cash burn. Q4 will be positive but it will be limited to a large degree given that another wave of stores are going to be in liquidation mode during Oct/Nov/Dec and holiday inventory will be light relative to last year's Q4. Add in that Q4 comps will likely be the worst of the year (as they were last year due to increased industry-wide promotional activity) and I think they next 2 quarters will be quite ugly operationally (not just liquidity-wise).

 

What all of this means to me is that there is plenty of time to wait and see how things play out. I am very curious to see what the company's asset base looks like in February, what the balance sheet looks like, and where the stock price is as a result. I could envision a scenario, if I happen to be right about much of this, where things get even worse for a while, there is more media negativity, and as a result.... dare I say.... the stock gets to a point where I start to think about slowly creeping into it. Not saying that will happen, but I think it's possible, and it's what I am closely monitoring. I don't have a particular price in mind (it will depend on the assets and the balance sheet at the time), but whereas I was not even thinking this way at $40 or $50 (my valuations are not nearly as high as the bulls), now that we are sitting at $27 and I expect things to get worse for a couple more quarters at least, it's more conceivable. The next couple of quarters should be very, very interesting.

 

why create a reit if you're not spinning it off? I expect (but of course don't know) they will spin off Seritage the way they spun off Lands End. Ie take on a $1.5B of debt against the income generating properties -- send $1B back to SHLD and $500M to further redevelop the properties.

[Kraven]

I think it's pretty clear that the real estate has a lot of value, perhaps even tremendous value.  However, consider a pile of gold that one has absolute rights to.  That is, if you can get your hands on it, assume it's yours.  But the gold is in North Korea so the question is how you get it.  Nothing, presumably, is impossible and if valuable enough perhaps there would be a way to access it.  But for every lever pulled there are ramifications and it gets messy.  Things could be worse even for the attempt.

 

The real estate is there.  In a vacuum it's valuable.  But how does it get monetized?  Selling it, spinning something off, creating a REIT, etc.  These are all potentially viable possibilities, but each lever will cause other issues especially in what appears to be the case that they are all in on SYW.  Maybe that ends at some point, but there has been no indication that they believe anything other than that it's on the right track and will be a big success.

[peridotcapital]

 

why create a reit if you're not spinning it off? I expect (but of course don't know) they will spin off Seritage the way they spun off Lands End. Ie take on a $1.5B of debt against the income generating properties -- send $1B back to SHLD and $500M to further redevelop the properties.

 

The way Eddie is running the company is by dividing it up into small autonomous divisions each competing for holding company capital. Just because Seritage is operated separately doesn't mean he will spin it off. He'd wind up with dozens of spin-offs by that logic alone. Also, I think it is interesting that no property ownership was transferred to Seritage. All of the properties are still owned by Sears Roebuck. Not that transfers can't take place, but if a spin-off was on the horizon short-term, such action might already have occurred.

 

That said, I think you are right long term but there are plenty of reasons to think it won't be for multiple years. Think about how much rental income the Seritage properties would have to generate to be able to comfortably support a debt load that could result in a huge dividend back to Sears Holdings. Assume $1.5B of bonds paying 5% interest. That's $75 million of interest, plus operating expenses, plus property taxes, plus maintenance costs. Seritage may be able to support that in 3-5 years, but not anytime soon based on their leasing productivity in the first couple of years.

 

And that doesn't even address the fact that Sears is strapped for cash right now, so every dollar of rental income they can get helps. Spinning off those assets now, while the company is burning cash, seems counterproductive since they could not get a large dividend back from a spin-off at this time.

[krazeenyc]

 

why create a reit if you're not spinning it off? I expect (but of course don't know) they will spin off Seritage the way they spun off Lands End. Ie take on a $1.5B of debt against the income generating properties -- send $1B back to SHLD and $500M to further redevelop the properties.

 

The way Eddie is running the company is by dividing it up into small autonomous divisions each competing for holding company capital. Just because Seritage is operated separately doesn't mean he will spin it off. He'd wind up with dozens of spin-offs by that logic alone. Also, I think it is interesting that no property ownership was transferred to Seritage. All of the properties are still owned by Sears Roebuck. Not that transfers can't take place, but if a spin-off was on the horizon short-term, such action might already have occurred.

 

That said, I think you are right long term but there are plenty of reasons to think it won't be for multiple years. Think about how much rental income the Seritage properties would have to generate to be able to comfortably support a debt load that could result in a huge dividend back to Sears Holdings. Assume $1.5B of bonds paying 5% interest. That's $75 million of interest, plus operating expenses, plus property taxes, plus maintenance costs. Seritage may be able to support that in 3-5 years, but not anytime soon based on their leasing productivity in the first couple of years.

 

And that doesn't even address the fact that Sears is strapped for cash right now, so every dollar of rental income they can get helps. Spinning off those assets now, while the company is burning cash, seems counterproductive since they could not get a large dividend back from a spin-off at this time.

 

I agree they would not be able to do a REIT spin off at this time -- they don't have enough space leased out (I don't count instore leasing).  I am guessing it would take 2-3 years. Assuming Seritage or whatever entity they spin off has appx 20 million square feet. They need to get to roughly 5+  million sq ft of $25 NNN space leased with the remaining 15 million sq ft leased by Sears for $5 NNN -- this rate assumes that the leases with Sears will be flexible allowing Seritage to do further redevelopment -- both increasing Seritage's rental income and decreases Sears' expense -- win win.  They should be able to easily support the $1.5 B in debt -- $1 Billion for dividend recap and $500M for future redevelopment of the property.

 

Given Eddie's history of spinoffs - over time, I expect many more to occur.

[peridotcapital]

 

why create a reit if you're not spinning it off? I expect (but of course don't know) they will spin off Seritage the way they spun off Lands End. Ie take on a $1.5B of debt against the income generating properties -- send $1B back to SHLD and $500M to further redevelop the properties.

 

The way Eddie is running the company is by dividing it up into small autonomous divisions each competing for holding company capital. Just because Seritage is operated separately doesn't mean he will spin it off. He'd wind up with dozens of spin-offs by that logic alone. Also, I think it is interesting that no property ownership was transferred to Seritage. All of the properties are still owned by Sears Roebuck. Not that transfers can't take place, but if a spin-off was on the horizon short-term, such action might already have occurred.

 

That said, I think you are right long term but there are plenty of reasons to think it won't be for multiple years. Think about how much rental income the Seritage properties would have to generate to be able to comfortably support a debt load that could result in a huge dividend back to Sears Holdings. Assume $1.5B of bonds paying 5% interest. That's $75 million of interest, plus operating expenses, plus property taxes, plus maintenance costs. Seritage may be able to support that in 3-5 years, but not anytime soon based on their leasing productivity in the first couple of years.

 

And that doesn't even address the fact that Sears is strapped for cash right now, so every dollar of rental income they can get helps. Spinning off those assets now, while the company is burning cash, seems counterproductive since they could not get a large dividend back from a spin-off at this time.

 

I agree they would not be able to do a REIT spin off at this time -- they don't have enough space leased out (I don't count instore leasing).  I am guessing it would take 2-3 years. Assuming Seritage or whatever entity they spin off has appx 20 million square feet. They need to get to roughly 5+  million sq ft of $25 NNN space leased with the remaining 15 million sq ft leased by Sears for $5 NNN -- this rate assumes that the leases with Sears will be flexible allowing Seritage to do further redevelopment -- both increasing Seritage's rental income and decreases Sears' expense -- win win.  They should be able to easily support the $1.5 B in debt -- $1 Billion for dividend recap and $500M for future redevelopment of the property.

 

Given Eddie's history of spinoffs - over time, I expect many more to occur.

 

So we're not that far off from each other. But to me it reinforces the notion that I don't have to be in a rush to get in. I don't see many catalysts over the next 6 months, maybe longer, if a REIT spin is off the table. Over that time the RE will be used to help fund SYW, which is unfortunate.

[thinkpad]

We are on page 666.

 

Now it is sure, SHLD is dead.

[Luke 532]

We are on page 666.

 

Now it is sure, SHLD is dead.

 

Nice one  :)

[txlaw]

It's entirely possible, I suppose, that ESL would actually re-organize SHLD into REIT-Co and Opco to "highlight" the RE value and expose the asset-lite ops, and then borrow against REIT-Co to continue to put cash into the transformation.  So SHLD shareholders would finally get to see what a pre-spinoff REIT-Co looks like with actual numbers (and underperforming assets top, given the below market leases I would expect to be put into place).

 

Either way, IV probably doesn't really change.  It's just that Mr. Market may finally recognize the value of REIT-Co.  And if ESL eventually spins off REIT-Co, shareholders will have the possibility to monetize that to Mr. Market.

[FCharlie]

If SHLD were to file to be a REIT, would they not have to first purge all retained earnings?

 

Weyerhaeuser had to distribute almost $30 per share in 2010... all their retained earnings since 1900... in order to become a REIT.

 

Although if SYW keeps going the way it has been, there won't be any retained earnings to distribute anyway!

 

http://online.wsj.com/articles/SB10001424052748703580104575361611144729330

 

 

[krazeenyc]

If SHLD were to file to be a REIT, would they not have to first purge all retained earnings?

 

Weyerhaeuser had to distribute almost $30 per share in 2010... all their retained earnings since 1900... in order to become a REIT.

 

Although if SYW keeps going the way it has been, there won't be any retained earnings to distribute anyway!

 

http://online.wsj.com/articles/SB10001424052748703580104575361611144729330

 

Sears does not have any retained earnings to purge.

[CorpRaider]

They need to form and spin a REIT that holds all the WFM leases.  I could sell WFM realty co before seritage.  Wow, so Berkowitz could basically take over the captain's chair at this point if he had maybe one other large shareholder in his corner.  I sort of like that.  I've never heard him say anything about shopping your way.

[ERICOPOLY]

What would be a spinoff-adjusted new low for the year?  Is the earlier low about $24?

[krazeenyc]

What would be a spinoff-adjusted new low for the year?  Is the earlier low about $24?

 

Just about.

 

[morningstar]

They need to form and spin a REIT that holds all the WFM leases.  I could sell WFM realty co before seritage.  Wow, so Berkowitz could basically take over the captain's chair at this point if he had maybe one other large shareholder in his corner.  I sort of like that.  I've never heard him say anything about shopping your way.

 

Lampert controls nearly 50% of the company, unless there's been updated filings I've missed. So I don't see Berkowitz taking over unless ESL goes completely off the deep end... Fairholme would need to get effectively every other shareholder on their side.

[CorpRaider]

Ah yes, I see only the ESL holdings were being considered in the source I was looking at (omitting the RBS).

[Luke 532]

It's the Perot family investment vehicle... David Radunsky is their COO.

 

Odd how PYOF was created/filed as a corporation just this past Friday (9/19/2014).  Go to the following link and type "PYOF Loans": http://www.bizapedia.com/company-search.aspx

 

And now getting in on the Lampert (and possibly Berkowitz) loan action.  Could it be they are just trying to get more information on the properties within the real estate portfolio and this might be a way to do that?

 

[elevensecsrt4]

It's the Perot family investment vehicle... David Radunsky is their COO.

 

Odd how PYOF was created/filed as a corporation just this past Friday (9/19/2014).  Go to the following link and type "PYOF Loans": http://www.bizapedia.com/company-search.aspx

 

And now getting in on the Lampert (and possibly Berkowitz) loan action.  Could it be they are just trying to get more information on the properties within the real estate portfolio and this might be a way to do that?

 

 

his background seems to be in law according to this site.

 

http://www.zoominfo.com/p/David-Radunsky/897982545

 

 

David Radunsky oversees investment functions operations for Perot Investments, including policies, oversight and controls for all bank and brokerage account relationships, trade confirmation and settlements, consulting relationship with accounting and legal matters. Mr. Radunsky holds over two decades of experience in private practice law and has worked extensively with intellectual property, including patents in medical and other fields. Prior to joining Perot, Mr. Radunsky served for six years as Chief Operations Officer, general counsel and board member at Tecnol Medical Products, which was later acquired by Kimberly Clark.

...

Mr. Radunsky spent five years in venture capital-backed start-up work, including consulting executive assignments and legal practice. Previously, Mr. Radunsky worked for 20 years at Carrington Coleman where he dealt with business transactions, tax and litigation issues. Mr. Radunsky earned a BS degree in business administration (1969) and a JD (1971) from the University of Missouri

[Vish_ram]

Sears Canada CEO stepping down

[zenith]

TRANSACTIONS IN SHARES BY ACCOUNTS ADVISED BY FAIRHOLME CAPITAL MANAGEMENT, L.L.C

 

 

Transaction Date Shares Price

Sale 09/24/2014      10,500      $26.40

Sale 09/25/2014      15,900      $26.05

[Liberty]

http://www.sec.gov/Archives/edgar/data/1056831/000091957414005383/d6106261_13d-a.htm

[hardincap]

Luke, this begs the question: if fairholme continues to sell will you stick with your position or follow fairholme out the door?

[nkp007]

Luke, this begs the question: if fairholme continues to sell will you stick with your position or follow fairholme out the door?

 

I'm not in yet, but am considering buying LEAP options if the price keeps falling.

 

My speculation is solely based on Berkowitz providing some rationality to the situation. This is a pure jockey speculation for me, but in this case the jockey isn't even in charge.

[Picasso]

TRANSACTIONS IN SHARES BY ACCOUNTS ADVISED BY FAIRHOLME CAPITAL MANAGEMENT, L.L.C

 

 

Transaction Date Shares Price

Sale 09/24/2014      10,500      $26.40

Sale 09/25/2014      15,900      $26.05

 

Is this a separately managed account that Fairholme is selling shares in?  I am confused.

 

Also, quite the dip to $24 and subsequent bounce to $26 in 30 minutes.  The volatility in this stock is something else.