SHLDQ - Sears Holdings Corp

[bmichaud]

Merkhet,

 

Would a dividend back to holdco not accomplish that?

[merkhet]

Merkhet,

 

Would a dividend back to holdco not accomplish that?

 

Well, the credit agreement prevents various transfers of assets, and it's possible that ESL couldn't pull a Land's End-type spin-off (spin & dividend to HoldCo) with the real estate assets without showing creditors that he was getting appropriate value for it.

[Guest wellmont]

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?

 

here's kinda how I see how value gets created by stock offerings and financings. say you own a company that, because it needs capital, has only marginal prospects or even poor ones. if you don't do "something" it might go bankrupt. But lets say that there is a plan in place that if it got some more money it could not only survive, but make it over the hump and start to thrive? To say it another way if you do "something" (like give it a little more money) this sucker might go up by more than you give it. I would say Current owners and new owners might be interested in this. financing is an essential part of the value creation process. why are all these companies raising money this year? and why do they mostly go up after they do? (study what happens after rights offerings) Because a company with a good business plan and the capital it needs to execute it is a good thing. that's what happened here.

 

no, shld intrinsic value did not increase $10 yesterday. that's not the point. what happened yesterday was $10 of intrinsic value was UNlocked. that's what spin offs and rights offering do. they unlock the value that was Already there. after all, there are 100s of pages in this thread saying the market price was Way below the IV at shld. So when ESL does something to close the gap, it's really surprising to see people say that he didn't "create" $10 of value. No, he Unlocked value that was already there. Besides, financial restructurings can create value. they create value by unlocking value, putting assets in the correct vehicles with the right capital structures (think taxes), and set up proper incentives for management and employees. ESL is in the Unlocking value stage at shld. And you are starting to see the results.

 

Joel Greenblatt talks about how managements Unlock and create value via rights offerings and spin offs in YCBASMG. Note that you can create equity value by playing around with capital structure (ratio of debt to equity), rights offerings, and spin offs.

[ni-co]

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?

 

here's kinda how I see how value gets created by stock offerings and financings. say you own a company that has only marginal prospects or even poor ones. if you don't do "something" it might go bankrupt. But lets say that there is a plan in place that if it got some more money it could not only survive, but make it over the hump and start to thrive? To say it another way if you do "something" (like give it a little more money) this sucker might go up by more than you give it. I would say Current owners and new owners might be interested in this. financing is an essential part of the value creation process. why are all these companies raising money this year? and why do they mostly go up after they do? (study what happens after rights offerings) Because a company with a good business plan and the capital it needs to execute it is a good thing. that's what happened here.

 

no, shld intrinsic value did not increase $10 yesterday. that's not the point. what happened yesterday was $10 of intrinsic value was UNlocked. that's what spin offs and rights offering do. they unlock the value that was Already there. after all, there are 100s of pages in this thread saying the market price was Way below the IV at shld. So when ESL does something to close the gap, it's really surprising to see people say that he didn't "create" $10 of value. No, he Unlocked value that was already there. Besides, financial restructurings can create value. they create value by unlocking value, putting assets in the correct vehicles and structures (think taxes), and set up proper incentives for management and employees. ESL is in the Unlocking value stage at shld. And you are starting to see the results.

 

Joel Greenblatt talks about how managements Unlock and create value via rights offerings and spin offs in YCBASMG. Note that you can create equity value by playing around with capital structure (ratio of debt to equity), rights offerings, and spin offs.

 

Completely agree. My comment was more about the immediate implications of this rights offering. No doubt changing the capital structure this way will also have consequences for the intrinsic value of SHLD mid to long term. Capital allocation can create value in spades, especially if it's done tax efficiently. Look no further than what Malone has done for the last two decades.

 

Apropos Joel Greenblatt: He will be on Wealthtrack next week (I'm afraid he's not going to talk about special situations though).

[BTShine]

Wellmont,

 

I completely agree.  This is about unlocking value.

 

Someone likened SHLD to gaining ownership of gold in North Korea (or something like that) and how "even though there is value you now own, you can't get to it."  I thought it was a fine example. 

 

This REIT news might be the equivalent of a North Korean coup d'état by more honorable/rational/fair people.  We just got closer to seeing the value of our assets.

[abitofvalue]

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?

 

but most of the notes are through non-guarantor subs.  Holdings doesn't stand behind them.  the whole point of structuring notes in that way is to allow Holdings flexibility to use the non-guarantor assets.  Let's not put lipstick on a pig. these are rights offerings and not spinoffs because holdings needs the cash to accomplish the attempted transformation. 

[benchmark]

Wellmont,

 

I completely agree.  This is about unlocking value.

 

Someone likened SHLD to gaining ownership of gold in North Korea (or something like that) and how "even though there is value you now own, you can't get to it."  I thought it was a fine example. 

 

This REIT news might be the equivalent of a North Korean coup d'état by more honorable/rational/fair people.  We just got closer to seeing the value of our assets.

 

ESL might have unlocked the value of the assets (or at least starting), but he is also asking shareholders to pay up first. Why is this better for shareholders who thought they had access to the value when they bought common in the first place?

[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?

 

but most of the notes are through non-guarantor subs.  Holdings doesn't stand behind them.  the whole point of structuring notes in that way is to allow Holdings flexibility to use the non-guarantor assets.  Let's not put lipstick on a pig. these are rights offerings and not spinoffs because holdings needs the cash to accomplish the attempted transformation.

 

I don't understand what you're saying.

 

Holdings is still subject to the 2011 Credit Agreement, which has covenants against Restricted Payments, such as spinoffs. I agree that ESL needs the money, but I think that even if he didn't need the money, it's unclear that he could have spun off the real estate without either satisfying one of the four requirements in the agreement or without getting good value from it for Holdings.

[Vish_ram]

From the peanut gallery:

 

I think this REIT thing will accelerate the bankruptcy of Sears. The only thing going for Sears was their cheap real estate. If annual cash burn is $1 billion without REIT, then post REIT , it'll be say $1.2B, the extra .2B goes to the REIT holders.

 

Also the REIT's will trade at a perennial discount until it gets rid of Sears as tenant. The REIT's will be tied to poorly performing Sears stores that'll struggle to pay the leases and then has to deal with finding new tenants. The new REIT holders are like passengers parachuted to the Titanic that is about to hit the iceberg.

 

This whole episode is like a B grade Hollywood movie, where a decent plumber who owned a home, car etc goes for a night drinking & gambling in a casino owned by mafia. He loses a lot, owes the mafia a ton of money. He comes home, sobers up and pays the mafia (cash burn) from his monthly earnings. First he sells his wife's jewelry. Mafia starts charging more, he does cash out refinancing of his home. After few months, he does a sales/lease back on his car & tools. The mafia keeps coming back for more and more.

 

He needs more and more cash as his bills keep piling up (car loan, mortgage etc). He ultimately ends up in bankruptcy with a broken leg.

 

I forgot to mention that his wife divorces him before his bankruptcy.

 

 

[wisdom]

$28 in 2019

 

There was a thread created for this kind of stuff i thought

[ScottHall]

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?

 

but most of the notes are through non-guarantor subs.  Holdings doesn't stand behind them.  the whole point of structuring notes in that way is to allow Holdings flexibility to use the non-guarantor assets.  Let's not put lipstick on a pig. these are rights offerings and not spinoffs because holdings needs the cash to accomplish the attempted transformation.

 

Can we go ahead and not talk about this stuff again? Kraven and I have covered this in pretty great detail... the "non-guarantor" thing is a myth.

[BTShine]

Does anyone else think that this REIT could be a buyout target, or at least will be more financially stable than SHLD, which will stop SPG and other REITs from low-balling SHLD when making offers to buy back anchor pads?  I'd think they've been waiting to see if Sears goes bk, which would give them an opportunity to buy the real estate at liquidation price.

 

Now with the REIT SPG and others will need to pay fair price for properties.  Thoughts?

[Matson125]

Does anyone else think that this REIT could be a buyout target, or at least will be more financially stable than SHLD, which will stop SPG and other REITs from low-balling SHLD when making offers to buy back anchor pads?  I'd think they've been waiting to see if Sears goes bk, which would give them an opportunity to buy the real estate at liquidation price.

 

Now with the REIT SPG and others will need to pay fair price for properties.  Thoughts?

 

I was thinking about this as well, if Sears chooses for example to put the Oakbrook Mall in the REIT but GGP doesn't want that, do they just bite the bullet and offer Sears full price before the REIT goes public?

 

Also if i were in a top management position at GGP or SPG, I'd be dusting off my resume to see if I can get a crack at running this.

[krazeenyc]

Sears Holdings Announces Plans For Mixed-Use Development In Aventura

 

http://finance.yahoo.com/news/sears-holdings-announces-plans-mixed-140300854.html

 

My guess is they'll follow the model they used at Ravenswood in Chicago (in terms of partnering with a developer and having the developer assume the construction risk). 

 

I think they're also trying to have the Santa Monica Sears (which is a standalone building right now)  redeveloped as well.

[smj]

It looks like now that the REIT is officially coming, the silence is being lifted and we will see more specific details about the numerous redevelopment plays in the planing stages.

 

It will be interesting to see in the prospectus what % of the rental income will be Sears/Kmart vs third party tenants.

 

 

[BTShine]

 

The mall is currently 2.7 million sq. ft. And Sears will add 250,000 sq. ft. of new retail and office space.  They're using top architect/design firms.

 

For valuation purposes, comps, etc.  this article below shows the mall owners refinanced a loan on 1 million square feet of the 2.1 million for $1.2 Billion.  That's $1,200 a square foot.  If Sears' future Aventura property sees that valuation it will be worth $300 million (250k x 1,200).

 

http://m.bizjournals.com/southflorida/news/2013/12/20/aventura-mall-loan-boosted-to-12b-in.html?r=full

[wisdom]

plus the office space and hotel.

[Matson125]

 

I know the Aventura mall quite well. I consider that Sears store to be the poster child of Sears' opportunity set. It is one of the highest grossing malls in the US, and it truly is a remarkably successful property. Each time I go in there I am just shocked--I don't know of any other mall like it, it's simply packed 100% of its opening hours with people that are buying enormous amounts of goods.

 

Of the 2 million sqft of retail space in that mall, there are 2 stores that make no sense: Sears and JCPenney. Having said that, as much as those stores clash with the rest of the mall, they are both profitable stores for those brands so SHLD and JCP may not feel the urgency to shut it down and sell the space (note Sears owns there store outright and JCP does not). While those stores do decently for their brands, they do quite terribly compared to the rest of the stores within that mall. So it's actually a positive for the brands, and a negative for the mall. Based on recent valuations of that mall space, I believe the Sears location is worth upwards of $200,000,000 if they simply shut it down tomorrow and asked Turnberry LLC (a joint venture between Simon Property Group and Turnberry Associates that owns Aventura mall)  to buy it from them. I don't believe this figure is aggressive at all, based on recent transactions I have seen as recent as end of December 2013 in the area.

 

So this location is the poster child for SHLD's value because they could continue to run this store at low levels of profitability, or they could shut it down tomorrow, bank $200,000,000, and buyback 5% of SHLD's equity. Or, they could do that with a few other properties and send out a much larger special dividend to its equity holders.

 

Then why don't they do this? That's the part that baffles me. Eddie can't possibly see any scenario where he can get more than $200M in value by owning it himself, and the Sears bulls believe that the mall owners would buy the space in a second, so why do these stores stay open quarter after quarter, year after year?

 

+1

 

Subleasing a space like this in a top quality mall like that should be a piece of cake!  That is the ultimate low hanging fruit.  For realtors who represent national chains looking to expand this should be an easy sell.  Top 5 mall in the U.S. and 100% occupied (from what I can see) shouldn't be around for 6 months if both parties negotiate in good faith. 

 

**I mentioned 6 months because that is when I first searched it.  It could have very well been on the site longer, which would be more perplexing**

 

I've been waiting on this!  I went to this mall right before Christmas last year.  High end retail stores (even a Ferrari store for the FCAU crowd).  I couldn't understand how at $over $1,000 a sq ft in sales Sears was not slicing their store space to allow of other high end retailers.  Looks like there was a plan all along.

 

 

How many more of these are there that haven't been announced yet??  I'd bet a few.

 

 

[BTShine]

plus the office space and hotel.

 

Good point! 

[BTShine]

This Aventure move shows SPG, GGP and other mall owners that if they don't want to pay fair value for properties they won't be able to control their malls because Sears will redevelop. 

 

SPG and Turnberry must want to have full control over their Aventura mall!  This move will start making other mall owners think hard about if they really want to let Sears redevelop anchor sites on their property.  It takes the negotiations from a standpoint of valuing anchor pads on the current square footage (100k sq ft X $200/sq ft value = $20 million) to negotiating based upon the properties potential value of over $300 million! (In this case 250k retail, hotel, office).

 

As said above, I just can't believe that SPG and Turnberry want to let Sears operate competing and complementary leasing at their Aventura Mall. 

 

Also, for those interested in construction costs of retail real estate.  Apparently big box retail costs about $50/sq. ft. to build.  Likely higher costs to build smaller specialty stores.  Maybe it will take $100 a square foot to build at Aventura.  That's $25 million to build their 250,000 sq. ft. of retail. If it really will be worth $300 million that's $275 million of 'found' profit.

 

http://newmarketadvisors.com/assets/Uploads/ConstructionSurveyCSA2012.pdf

[peridotcapital]

This Aventure move shows SPG, GGP and other mall owners that if they don't want to pay fair value for properties they won't be able to control their malls because Sears will redevelop. 

 

SPG and Turnberry must want to have full control over their Aventura mall!  This move will start making other mall owners think hard about if they really want to let Sears redevelop anchor sites on their property.  It takes the negotiations from a standpoint of valuing anchor pads on the current square footage (100k sq ft X $200/sq ft value = $20 million) to negotiating based upon the properties potential value of over $300 million! (In this case 250k retail, hotel, office).

 

As said above, I just can't believe that SPG and Turnberry want to let Sears operate competing and complementary leasing at their Aventura Mall.

 

I would guess the formula the likes of SPG and GGP will use to come up with offers for Sears properties won't change. They figure out what rents they can expect post-redevelopment, estimate construction costs, and use their IRR target for new projects to come up with an offer. It's the same process they would use to value early lease buyouts or any other land acquisitions.

 

Now, if they are firmly against Sears controlling the space, then sure, they might make more offers on more locations once they see Sears going alone on certain properties, which gives Sears more options and the chance to accelerate the number of deals they have in the pipeline. But the idea that the dollar value of the offers are going to skyrocket seems unlikely to me. Maybe they bump them up 5-10% if their development pipelines are thin, but property valuation is pretty straightforward.

[Matson125]

Attached in the Bloomberg article is a view of the proposed development

 

http://www.bloomberg.com/news/2014-11-10/sears-florida-development-gives-preview-of-strategy.html?cmpid=yhoo

[BTShine]

Exactly, Luke.

[Luke 532]

I would guess the formula the likes of SPG and GGP will use to come up with offers for Sears properties won't change. They figure out what rents they can expect post-redevelopment, estimate construction costs, and use their IRR target for new projects to come up with an offer. It's the same process they would use to value early lease buyouts or any other land acquisitions.

 

Sure, but that doesn't mean their offers won't change.  When David Simon was trying to buy GGP when they were in bankruptcy proceedings 5 years ago and then later changed his offer, it's not as if he changed his model.  Instead, he just adjusted his price.  Who would offer top dollar on anything (real estate in this case... buying a home, car, etc. in other daily situations) unless forced to do so?  Heck, I don't even offer top dollar during trades in my fantasy football leagues and those are just for fun.  :)

[Luke 532]

Exactly, Luke.

 

Sorry, deleted and reposted... so the comment you're responding to is below your comment.