SHLDQ - Sears Holdings Corp

[heth247]

Prior to the REIT news:  $33 a share got you ownership of Sears and all of the financial upside purported to exist in the potential exploitation of real estate.

 

 

 

After the REIT news: $43 a share gets you ownership of Sears the obligation to pay even more if you want the financial upside purported to exist in the real estate.

 

 

 

In other words, if you don't pay even more (for the REIT rights) then you lose the financial upside from the real estate that you had the right to prior to the rights offering.  Yet, based on the stock price, the market views this whole thing as a positive for investors?

 

You could always sell SHLD now and wait for the REIT to trade then buy it. Or wait for the rights to come out then sell the remaining SHLD, buy more rights , buy more REIT. I get what you are saying but there are options if think the real estate has the most upside.

 

Probably the best way to go is just buy and hold like ESL and BB do. At today's price, counting spin off of LE and the SHLDZ,  the share price for one share of SHLD you bought at the beginning of the year would have been worth of $60+. 

[BTShine]

Sears said it sold Cupertino store for $102 million.

 

I think that was reported before in local news up by the bay. I think part of the reason Sears got so much more for their property is that their property includes 75-80k of renovated high end gym space -- which I assume the developer is keeping.

 

Apologies if you feel I'm reposting news.  Thought it was a rumor before and this was the first time SHLD confirmed that purchase price. 

[ScottHall]

It'll be interesting to see how this rights offering is structures.

 

Glad to see Eddie attempting to monetize some of the real estate here; will be even more interesting to see what he does with the proceeds. The moment this goes from shitty retailer to investment co, I would be very interested in adding it as a core, long-term holding.

 

As it stands I'm still on the sidelines.

[hardincap]

Everyone saying "I'm going to wait until X" is missing the point - uncertainty creates opportunity. By the time X happens, the opportunity will be gone. Unless you're a high frequency trading algorithm.

 

If you see value in the real estate and think lampert will act rationally to realize value, then doesn't it make sense to buy today? the key question is whether he'll act rationally, but c'mon, he didnt get to billionaire status by being irrational

[krazeenyc]

Sears said it sold Cupertino store for $102 million.

 

I think that was reported before in local news up by the bay. I think part of the reason Sears got so much more for their property is that their property includes 75-80k of renovated high end gym space -- which I assume the developer is keeping.

 

Apologies if you feel I'm reposting news.  Thought it was a rumor before and this was the first time SHLD confirmed that purchase price.

 

This is the first time it was confirmed by SHLD -- tax records though confirmed the price.

[alertmeipp]

Everyone saying "I'm going to wait until X" is missing the point - uncertainty creates opportunity. By the time X happens, the opportunity will be gone. Unless you're a high frequency trading algorithm.

 

If you see value in the real estate and think lampert will act rationally to realize value, then doesn't it make sense to buy today? the key question is whether he'll act rationally, but c'mon, he didnt get to billionaire status by being irrational

 

Only I had kept my $40 calls! Congrats to the longs.

 

[ni-co]

Prior to the REIT news:  $33 a share got you ownership of Sears and all of the financial upside purported to exist in the potential exploitation of real estate.

 

After the REIT news: $43 a share gets you ownership of Sears the obligation to pay even more if you want the financial upside purported to exist in the real estate.

 

In other words, if you don't pay even more (for the REIT rights) then you lose the financial upside from the real estate that you had the right to prior to the rights offering.  Yet, based on the stock price, the market views this whole thing as a positive for investors?

 

You should reconsider your statement – at least from a value investor's perspective it doesn't make any sense. The difference between SHLD at $43 and SHLD at $33 is $10 per share. That's all that has changed.

How can the intrinsic value of a company change by a REIT announcement? Either the REIT is a great deal, then buy it and sell SHLD proportionally – nothing's lost. Or it's a bad deal, then don't buy it and cheer because you're a shareholder and benefit from the Bozos buying the REIT. Nobody forces you to buy anything or add to your position. The only problem you might encounter is tax.

 

I think Lampert is going to make it attractive to buy into the REIT – like he did with the bond offering – because he wants those offerings to be a success.

[20ppy]

Hi all,

 

If you hold SHLDZ, when do you have to pay to buy the bonds?

You need to call your broker to get the precise information. Following is fyr.

Nov 13th is the last trading day, you need to exercise your rights before then, pay for the bonds and get the warrants. Be careful not to let the rights expire!

[BTShine]

Prior to the REIT news:  $33 a share got you ownership of Sears and all of the financial upside purported to exist in the potential exploitation of real estate.

 

After the REIT news: $43 a share gets you ownership of Sears the obligation to pay even more if you want the financial upside purported to exist in the real estate.

 

In other words, if you don't pay even more (for the REIT rights) then you lose the financial upside from the real estate that you had the right to prior to the rights offering.  Yet, based on the stock price, the market views this whole thing as a positive for investors?

 

 

I think Lampert is going to make it attractive to buy into the REIT – like he did with the bond offering – because he wants those offerings to be a success.

 

Agreed. 

 

I could see the transaction looking something like this:

 

250 stores @ 100,000 sq. ft. per store = 25 million sq. ft

 

Initially lease to Sears & Kmart at ~ $4.00 sq ft. generating $100 million each year ($4 x 25 million = $100 million).  This lease rate is probably lower than market, but might be a good starting point for the retailers.  It's a rate 'they can handle' for now. 

 

Cap rate of approx. 7% makes the properties worth around $1.4 Billion. 

 

Mortage on properties of $800 million (immediately given to SHLD via dividend pre-spinoff; just like the LE spinoff). 

 

SHLD shareholders pay in $600 million to SHLD for the equity. 

 

Over the next 5 - 10 years the properties will be redeveloped, some re-tennanted at higher rates, etc, etc., etc.  and the lease income received will drastically increase.  The value of this REIT will increase, too.

 

--------------

Extra:  Has anyone looked at this report? 

http://www.bouldergroup.com/NLBB.pdf

 

From Feb 2014 and gives an estimate for investment grade and non-investment grade big box real estate value.  Both are well over $100 per sq. ft.

[tooskinneejs]

You should reconsider your statement – at least from a value investor's perspective it doesn't make any sense. The difference between SHLD at $43 and SHLD at $33 is $10 per share. That's all that has changed.

How can the intrinsic value of a company change by a REIT announcement? Either the REIT is a great deal, then buy it and sell SHLD proportionally – nothing's lost. Or it's a bad deal, then don't buy it and cheer because you're a shareholder and benefit from the Bozos buying the REIT. Nobody forces you to buy anything or add to your position. The only problem you might encounter is tax.

 

I think Lampert is going to make it attractive to buy into the REIT – like he did with the bond offering – because he wants those offerings to be a success.

 

I didn't say intrinsic value changed.  I simply made note of the market's befuddled reaction:  owners cheering the news (via the stock price increase) that they would have to pay for something they thought they already owned if they wanted to "really" own it.

 

The substance of this transaction: owners being forced to further fund the operating losses of the terminal retail stores just to maintain their rights to the real estate.  Whoever said shareholders' liabilities for losses were limited to their investment in common stock hadn't met the master of the rights offering tactic.

[krazeenyc]

Prior to the REIT news:  $33 a share got you ownership of Sears and all of the financial upside purported to exist in the potential exploitation of real estate.

 

After the REIT news: $43 a share gets you ownership of Sears the obligation to pay even more if you want the financial upside purported to exist in the real estate.

 

In other words, if you don't pay even more (for the REIT rights) then you lose the financial upside from the real estate that you had the right to prior to the rights offering.  Yet, based on the stock price, the market views this whole thing as a positive for investors?

 

 

I think Lampert is going to make it attractive to buy into the REIT – like he did with the bond offering – because he wants those offerings to be a success.

 

Agreed. 

 

I could see the transaction looking something like this:

 

250 stores @ 100,000 sq. ft. per store = 25 million sq. ft

 

Initially lease to Sears & Kmart at ~ $4.00 sq ft. generating $100 million each year ($4 x 25 million = $100 million).  This lease rate is probably lower than market, but might be a good starting point for the retailers.  It's a rate 'they can handle' for now. 

 

Cap rate of approx. 7% makes the properties worth around $1.4 Billion. 

 

Mortage on properties of $800 million (immediately given to SHLD via dividend pre-spinoff; just like the LE spinoff). 

 

SHLD shareholders pay in $600 million to SHLD for the equity. 

 

Over the next 5 - 10 years the properties will be redeveloped, some re-tennanted at higher rates, etc, etc., etc.  and the lease income received will drastically increase.  The value of this REIT will increase, too.

 

--------------

Extra:  Has anyone looked at this report? 

http://www.bouldergroup.com/NLBB.pdf

 

From Feb 2014 and gives an estimate for investment grade and non-investment grade big box real estate value.  Both are well over $100 per sq. ft.

 

The reit is likely going to include many of the properties that already have tenants (probably a lot of the Seritage properties). A reit with ONLY sears as a tenants would likely get a really really low multiple.

 

But with Primark, Whole Foods, Nordstroms, Dicks, Sports Authority, etc. the multiple will be higher and the value will go up as Sears square footage is replaced by market rate tenants.

 

[fareastwarriors]

Sears Still Isn’t a Store of Value

 

 

http://online.wsj.com/articles/sears-still-isnt-a-store-of-value-heard-on-the-street-1415399633

[peridotcapital]

Prior to the REIT news:  $33 a share got you ownership of Sears and all of the financial upside purported to exist in the potential exploitation of real estate.

 

After the REIT news: $43 a share gets you ownership of Sears the obligation to pay even more if you want the financial upside purported to exist in the real estate.

 

In other words, if you don't pay even more (for the REIT rights) then you lose the financial upside from the real estate that you had the right to prior to the rights offering.  Yet, based on the stock price, the market views this whole thing as a positive for investors?

 

You should reconsider your statement – at least from a value investor's perspective it doesn't make any sense. The difference between SHLD at $43 and SHLD at $33 is $10 per share. That's all that has changed.

How can the intrinsic value of a company change by a REIT announcement? Either the REIT is a great deal, then buy it and sell SHLD proportionally – nothing's lost. Or it's a bad deal, then don't buy it and cheer because you're a shareholder and benefit from the Bozos buying the REIT. Nobody forces you to buy anything or add to your position. The only problem you might encounter is tax.

 

I think Lampert is going to make it attractive to buy into the REIT – like he did with the bond offering – because he wants those offerings to be a success.

 

I think the point that was being made had nothing to do with intrinsic value. Let's say you bought SHLD at $33 thinking that intrinsic value was $66, most of which is from the real estate. Today you wake up and you find out you are going to have to put up more capital to maintain the same ownership in SHLD's assets due to the REIT rights offering.

 

Let's say you have to put up another $5 per share to get proportional ownership of the REIT. Now your cost basis is $38 but your intrinsic value estimate remains $66 (as you correctly point out). So, your upside to intrinsic value in this example has been reduced from 100% to 74% even though the company's assets are completely unchanged. Accordingly, today the stock price should have gone down, not up. Of course, the stock does not track intrinsic value in the short term because other market forces are at play, but I think the original poster's point was that a $10 increase in share price today was irrational.

[HeresyValue]

Prior to the REIT news:  $33 a share got you ownership of Sears and all of the financial upside purported to exist in the potential exploitation of real estate.

 

After the REIT news: $43 a share gets you ownership of Sears the obligation to pay even more if you want the financial upside purported to exist in the real estate.

 

In other words, if you don't pay even more (for the REIT rights) then you lose the financial upside from the real estate that you had the right to prior to the rights offering.  Yet, based on the stock price, the market views this whole thing as a positive for investors?

 

You should reconsider your statement – at least from a value investor's perspective it doesn't make any sense. The difference between SHLD at $43 and SHLD at $33 is $10 per share. That's all that has changed.

How can the intrinsic value of a company change by a REIT announcement? Either the REIT is a great deal, then buy it and sell SHLD proportionally – nothing's lost. Or it's a bad deal, then don't buy it and cheer because you're a shareholder and benefit from the Bozos buying the REIT. Nobody forces you to buy anything or add to your position. The only problem you might encounter is tax.

 

I think Lampert is going to make it attractive to buy into the REIT – like he did with the bond offering – because he wants those offerings to be a success.

 

, but I think the original poster's point was that a $10 increase in share price today was irrational.

 

Right. And he'd be wrong because that presupposes that the market valuation pre-announcement was rational, which it was not because it extremely discounted the real estate. Thus by making a move, regardless of how it's done, opens up varying degrees of the underlying real estate to the valuation process of which it previously was a small part relative to it's full value. Why does this have to be explained on a 'value' board?

[Luke 532]

Of course, the stock does not track intrinsic value in the short term because other market forces are at play, but I think the original poster's point was that a $10 increase in share price today was irrational.

 

Similar to the stock dropping $9 a while back due to a bridge loan.  A freaking bridge loan. 

 

The way SHLD trades is irrational on so many levels.  It's as if Graham was thinking of this very kind of price action when writing Chapter 8 of The Intelligent Investor (no, I'm not saying he would like SHLD, I'm just talking about the irrational price action).

[hardincap]

The company's assets grew by the $5 you put up, so your cost basis and intrinsic value estimate should go up proportionally. You simply have more vested.

 

Let's say you have to put up another $5 per share to get proportional ownership of the REIT. Now your cost basis is $38 but your intrinsic value estimate remains $66 (as you correctly point out). So, your upside to intrinsic value in this example has been reduced from 100% to 74% even though the company's assets are completely unchanged.

[tooskinneejs]

 

I could see the transaction looking something like this:

 

250 stores @ 100,000 sq. ft. per store = 25 million sq. ft

 

Initially lease to Sears & Kmart at ~ $4.00 sq ft. generating $100 million each year ($4 x 25 million = $100 million).  This lease rate is probably lower than market, but might be a good starting point for the retailers.  It's a rate 'they can handle' for now. 

 

Cap rate of approx. 7% makes the properties worth around $1.4 Billion. 

 

Mortage on properties of $800 million (immediately given to SHLD via dividend pre-spinoff; just like the LE spinoff). 

 

SHLD shareholders pay in $600 million to SHLD for the equity. 

 

Over the next 5 - 10 years the properties will be redeveloped, some re-tennanted at higher rates, etc, etc., etc.  and the lease income received will drastically increase.  The value of this REIT will increase, too.

 

250 stores represents approximately one-third of all owned stores.  Based on the assumptions above and assuming (1) these represent a cross-section of the quality/value spectrum and (2) the company did three tranches of REIT offerings to liquidate all real estate:

 

3 groups of 250 stores x $1.4 billion each = $4.2 billion in total value

 

If shareholders pay $600 million for each of the 3 rights offerings, they've paid $1.8 billion to participate in the entire portfolio of real estate.  Add to that the amount shareholders have already paid for ownership of all of the stores (via their past purchase of stock, assuming today's market capitalization of $4.5 billion) and you are essentially looking at a total shareholders' investment of $6.3 billion for stores worth an assumed $4.2 billion. 

[tooskinneejs]

The company's assets grew by the $5 you put up, so your cost basis and intrinsic value estimate should go up proportionally. You simply have more vested.

 

 

That would certainly be true on day one when they still have the $5 on hand.  The problem here is that you've got an operating entity that is rapidly burning through cash.  In the first half of this year, they burned through about $750 million of cash and there doesn't appear to be an end in sight in the near future.  In all likelihood, the shareholders' additional cash investment for these rights will be consumed quickly by the retail stores' money-losing operations.  Therefore, I don't believe in this case that intrinsic value rises in proportion to the cash invested.

[ScottHall]

Everyone saying "I'm going to wait until X" is missing the point - uncertainty creates opportunity. By the time X happens, the opportunity will be gone. Unless you're a high frequency trading algorithm.

 

If you see value in the real estate and think lampert will act rationally to realize value, then doesn't it make sense to buy today? the key question is whether he'll act rationally, but c'mon, he didnt get to billionaire status by being irrational

 

 

I understand where you're coming from here, but I think it is more the view of someone trying to capture the one-off difference between a company's stock price and intrinsic value than being a fundamental truth. There's nothing wrong with that, but we have to keep in mind priorities.

 

I think  it matters quite a bit. I have no interest in partnering with Eddie Lampert in Sears and Kmart, the retailers. I have great interest in partnering with him as a capital allocator. Will I have to pay up for the privilege if I wait and the turnaround comes? Yeah, probably.

 

But I'm taking less risk of this being a goose egg, and the market pretty much systematically undervalued companies that are capable of compounding value at a high clip over time. If I have to buy Sears at 1.5x or 2x whatever book is at the time (assuming it's positive), but I think Eddie can grow book at 15% a year, the result will still be fantastic.

 

The company's assets grew by the $5 you put up, so your cost basis and intrinsic value estimate should go up proportionally. You simply have more vested.

 

 

That would certainly be true on day one when they still have the $5 on hand.  The problem here is that you've got an operating entity that is rapidly burning through cash.  In the first half of this year, they burned through about $750 million of cash and there doesn't appear to be an end in sight in the near future.  In all likelihood, the shareholders' additional cash investment for these rights will be consumed quickly by the retail stores' money-losing operations.  Therefore, I don't believe in this case that intrinsic value rises in proportion to the cash invested.

 

Setting aside any possible fraudulent conveyance issues, I think it is useful to remember that corporations are generally legally separate from their owners and, as shareholders, you will generally not be responsible for its liabilities.

 

If you think about it from that perspective, then yes, the IV can change beyond the simple math of how much you have to pony up to get the properties because you can potentially extract greater value from the transaction than what you contribute. You have an embedded put option on your shares, essentially, with a strike price of zero when the value of your company falls below zero.

 

So assuming you can acquire those properties at below intrinsic value... it could actually change your upside and downside scenarios quite a bit. Just random thoughts.

[ni-co]

I think the point that was being made had nothing to do with intrinsic value. Let's say you bought SHLD at $33 thinking that intrinsic value was $66, most of which is from the real estate. Today you wake up and you find out you are going to have to put up more capital to maintain the same ownership in SHLD's assets due to the REIT rights offering.

 

Let's say you have to put up another $5 per share to get proportional ownership of the REIT. Now your cost basis is $38 but your intrinsic value estimate remains $66 (as you correctly point out). So, your upside to intrinsic value in this example has been reduced from 100% to 74% even though the company's assets are completely unchanged. Accordingly, today the stock price should have gone down, not up. Of course, the stock does not track intrinsic value in the short term because other market forces are at play, but I think the original poster's point was that a $10 increase in share price today was irrational.

 

You're assuming – like tooskinneejs did – that you'd have to keep your ownership percentage constant. You do not. This was my point. If you assume the REIT to be a fair deal, then you can sell your shares in the amount you "have to" put up in the rights offering and nothing will change economically (again: except tax implications). Assuming the REIT is a fair deal, my economic ownership won't change in this case. Now, if you want to keep your legal ownership percentage constant, you will have to spend money; that's true. While this may be very important to ESL and maybe to BB, too, what's the point in it four us (or at least for me?). All I care about is economic ownership.

 

Under the assumption that the REIT is either a bad or a good deal (=unfair to shareholders or unfair to SHLD), there would even be a chance to increase my economic ownership if I pick the right deal (meaning keeping the REIT only or SHLD only). I'm going to have to do some guesswork though.

 

Another way to look at it: You said: "Today you wake up and you find out you are going to have to put up more capital to maintain the same ownership in SHLD's assets due to the REIT rights offering." That's incorrect. The money you "have to" put up increases your personal assets. Think about it: Now you own the RE and the money you gave to SHLD (through your ownership stake in SHLD). I know, it's very uncertain whether this money keeps its value there – but that's another discussion.

[tooskinneejs]

The money you "have to" put up increases your personal assets. Think about it: Now you own the RE and the money you gave to SHLD (through your ownership stake in SHLD). I know, it's very uncertain whether this money keeps its value there – but that's another discussion.

 

How does taking money from your cash account to fund a further investment in SHLD "increase your personal assets"?  Isn't that just a case of reallocation of your assets, but not an increase in your assets?

[valueinvestor82]

Thank you ni-co. Remember a board that has 90 pages on Amazon, the "company of the future...always the future" isn't purely a value crowd. I was thinking, what is the confusion here? isn't it clear that the company would now have an increase of your cash in their bank account? This is basic rights offering stuff. If you say "well, they'll burn it." Possibly, but for that to be true they would have burned some other cash that they came up with, so it's still a net positive from where they were cash-wise and it doesn't somehow suck the value of your real estate ownership out.

 

Oh and I had a 3-6% position in the $24-$33 range for my clients, so while the strong "Sears still sucks" debate is going on, I'll be toasting to my clients on a nice short term profit.  :P

[BTShine]

Yes, it's a reallocation of assets.

[Scudbucket]

Yes, it's a reallocation of assets.

 

It's both.

 

It's a reallocation of assets because your cash is now a security.

 

It's an increase in assets because even though your $10 of cash is $10 in a security, that security, is going to throw off more cash than actual cash sitting in an account.  In other words, the $10 cash to buy the security (reallocation), if in a REIT, is going to pay 90% of income every year.  Likely, that's higher than a money market.  So, I think it's both.

[merkhet]

There was a post a couple pages back about how it sucks that ESL is doing all of these things as rights offerings rather than spinoffs.

 

Has it occurred to people that, by the very nature of the notes agreements, ESL isn't able to merely spin-off assets without providing something to Holdings in return?