SHLDQ - Sears Holdings Corp

[adesigar]

Simon Property Group Conference Call transcript

http://www.thestreet.com/story/13231191/5/simon-property-group-spg-earnings-report-q2-2015-conference-call-transcript.html

 

 

Paul Morgan (Analyst - MLV):

 

Thanks. Then just my follow-up on the Sears joint venture, how far you into the process of going through andn saying: well, here's what we're going to do near-term, here's what we would like to do longer-term? And kind of how -- the size of the potential redevelopments and the timing, and when we might get some of those details.

Rick Sokolov (President, COO):

Hi, it's Rick. We are very far along in that process. We have already had multiple meetings with Seritage. We have developed redevelopment plans for each of the assets. They are in the process right now of being priced. And as they become mature, we will announce them and proceed forward. But they include the addition of specialty stores, small expansions, adding restaurants, adding boxes, and appropriately sizing Sears.

Bear in mind, in our venture it's almost 850,000 square feet of additional space that we are going to be able to redeploy along with those TBA auto centers. So it's a great opportunity, and we're well into it.

Paul Morgan (Analyst - MLV):

Great. Thanks.

[ni-co]

BB's update on SHLD's NAV:

 

The market price of Sears Holdings Corporation (7.1% of the Fund portfolio) reflects intense skepticism about the company’s net assets and ability to transform its operating business. Since the Fund initiated its investment, Sears has distributed $31.85 to its shareholders via spin-offs and other corporate actions. Most recently, Sears sold 235 properties, plus joint venture interests in 31 additional properties, for $3.1 billion in cash proceeds. While the market is still digesting the facts associated with this recent separation transaction, our updated sum-of-the-parts valuation exceeds $125 per share fully diluted, net of debt. We expect the company’s focus on “profitability instead of revenues” to result in operational efficiencies, expense reductions, and gross margin improvement.

 

http://www.fairholmefunds.com/s/FAIRX-Semi-Annual-Report.pdf

[GCA]

Anyone know how this rights offering would impact a short put and warrant position? How does the exercise price get adjusted? Thanks

 

Option adjustments:

SHLD@NASDAQ ; Rights Issue ; Jun 10, 2015 ; 36858

36859

36860

36864

36865

36866

36867

36868

36869

36870 ;

 

 

All OCC memos may be accessed by navigating to http://www.theocc.com/webapps/infomemos ( http://www.theocc.com/webapps/infomemos )

Memo 36858 is probably what you're looking for, for options.

 

For the warrant, adjustments are decided by the Board IIRC. It'll likely be either the market value of the rights at close yesterday, or an average of the market value over the life of the rights.

 

http://www.optionsclearing.com/webapps/infomemos;OCCPROD0PUBSESSION=4B352A19A54F6C931C2301F4BB4B900A.occ-ppube4l?number=36859&data-ipsquote-timestamp=201506&lastModifiedDate=06%2F08%2F2015+16%3A03%3A57

 

"The underlying price for SHLD1/1SHLD1 will be determined as follows:

SHLD1 = SHLD + 0.30 (LE) + 0.0236 + SRG RT

 

The SRG RT component of adjusted options SHLD1/1SHLD1 will remain a part of the SHLD1/1SHLD1 deliverable until the Rights have expired. Once the expiration of the Rights has been confirmed, the SRG RT component will be removed from the SHLD1/1SHLD1 deliverable. This change to the deliverables is expected to be effective on July 6, 2015."

 

So we lose all the value of Seritage (from the rights)... this sucks!

 

 

See the reader comments on this article about the warrant price/count adjustments…

 

http://seekingalpha.com/article/3256615-sears-holdings-common-warrants-and-seritage-rights-are-substantially-mispriced

 

As far as I can tell the exercise price on the warrants never adjusted... anyone know why?

[Scudbucket]

I think the new exercise is 25.686.

[peridotcapital]

BB's update on SHLD's NAV:

 

The market price of Sears Holdings Corporation (7.1% of the Fund portfolio) reflects intense skepticism about the company’s net assets and ability to transform its operating business. Since the Fund initiated its investment, Sears has distributed $31.85 to its shareholders via spin-offs and other corporate actions. Most recently, Sears sold 235 properties, plus joint venture interests in 31 additional properties, for $3.1 billion in cash proceeds. While the market is still digesting the facts associated with this recent separation transaction, our updated sum-of-the-parts valuation exceeds $125 per share fully diluted, net of debt. We expect the company’s focus on “profitability instead of revenues” to result in operational efficiencies, expense reductions, and gross margin improvement.

 

http://www.fairholmefunds.com/s/FAIRX-Semi-Annual-Report.pdf

 

Always comical to see him continuing to defend this position. I would love to see the values he assigns Sears and Kmart in this SOTP analysis. I think he needs a new Sears analyst. Can anyone back into the $31.85 figure he cites? I can't get close and this should be an easily verifiable number. Maybe I forgot something, but here is what I have in my files:

 

2011 Orchard Supply Spinoff: zero value (filed for bankruptcy in 2013)

2012 Hometown Rights Offering: negative value (priced at $15.00)

2012 Partial Canada Spinoff: ~$5 per SHLD share (including special dividends)

2014 Lands End Spinoff: ~$7 per SHLD share

2014 Partial Canada Rights Offering: negative value (priced at $9.50)

2014 Notes/Warrants Rights Offering: ~$3 per SHLD share

2015 Seritage Rights Offering: ~$5 per SHLD share

 

Add all of that up and you get ~$20 per SHLD ($17 if you count the two bad rights offering as negatives instead of zeros). Even if you are more generous and assume a holder sold every distribution upon receipt you only get a total of ~$24 per SHLD share.

 

Am I forgetting something or are the verifiable assertions Fairholme publishes not even accurate?

[peridotcapital]

 

As far as I can tell the exercise price on the warrants never adjusted... anyone know why?

 

If true, my guess would be because SHLD received 100% of the proceeds from the real estate sales, which were priced at fair market value, in cash. In that case, why would there be an adjustment to the exercise price? It seems like it would be treated just like any other company selling an asset outright for cash... option strikes aren't adjusted in those cases, as an example, correct?

[T-bone1]

BB's update on SHLD's NAV:

 

The market price of Sears Holdings Corporation (7.1% of the Fund portfolio) reflects intense skepticism about the company’s net assets and ability to transform its operating business. Since the Fund initiated its investment, Sears has distributed $31.85 to its shareholders via spin-offs and other corporate actions. Most recently, Sears sold 235 properties, plus joint venture interests in 31 additional properties, for $3.1 billion in cash proceeds. While the market is still digesting the facts associated with this recent separation transaction, our updated sum-of-the-parts valuation exceeds $125 per share fully diluted, net of debt. We expect the company’s focus on “profitability instead of revenues” to result in operational efficiencies, expense reductions, and gross margin improvement.

 

http://www.fairholmefunds.com/s/FAIRX-Semi-Annual-Report.pdf

 

Always comical to see him continuing to defend this position. I would love to see the values he assigns Sears and Kmart in this SOTP analysis. I think he needs a new Sears analyst. Can anyone back into the $31.85 figure he cites? I can't get close and this should be an easily verifiable number. Maybe I forgot something, but here is what I have in my files:

 

2011 Orchard Supply Spinoff: zero value (filed for bankruptcy in 2013)

2012 Hometown Rights Offering: negative value (priced at $15.00)

2012 Partial Canada Spinoff: ~$5 per SHLD share (including special dividends)

2014 Lands End Spinoff: ~$7 per SHLD share

2014 Partial Canada Rights Offering: negative value (priced at $9.50)

2014 Notes/Warrants Rights Offering: ~$3 per SHLD share

2015 Seritage Rights Offering: ~$5 per SHLD share

 

Add all of that up and you get ~$20 per SHLD ($17 if you count the two bad rights offering as negatives instead of zeros). Even if you are more generous and assume a holder sold every distribution upon receipt you only get a total of ~$24 per SHLD share.

 

Am I forgetting something or are the verifiable assertions Fairholme publishes not even accurate?

 

My guess is that he is looking at the value of everything spun off if you sold it rather than hold onto it

[ni-co]

 

As far as I can tell the exercise price on the warrants never adjusted... anyone know why?

 

If true, my guess would be because SHLD received 100% of the proceeds from the real estate sales, which were priced at fair market value, in cash. In that case, why would there be an adjustment to the exercise price? It seems like it would be treated just like any other company selling an asset outright for cash... option strikes aren't adjusted in those cases, as an example, correct?

 

Yes. Shows you that the market reaction was a bit over the top. Dropped as if it were a spin-off. Wouldn't you say that Berkowitz was about right re the values of the Seritage RE?

[randallchsu]

http://www.sec.gov/Archives/edgar/data/1214344/000091957415005575/xslF345X03/p6736962.xml

 

based on this filing it looks the the warrant's strike price is $25.686

[peridotcapital]

Yes. Shows you that the market reaction was a bit over the top. Dropped as if it were a spin-off. Wouldn't you say that Berkowitz was about right re the values of the Seritage RE?

 

Actually, I think the SRG deal ($75/sf) shows that Fairholme has overvalued the real estate. The thesis Bruce has stated repeatedly is that the "other" assets (brands, home services, auto centers, warranty, Canada, etc) net out all of the liabilities. Therefore, the conclusion was that the value of real estate plus the core Sears and Kmart retail operations were worth more than $150/share.

 

After the SRG deal ($29/share of proceeds) he still thinks SHLD is worth $125/share, or $13 billion. Therefore, either 1) he is overvaluing the real estate, or 2) his real estate values are right and he thinks the retail operations today are worth $9 billion (the remaining real estate is worth about $4 billion at $75/sf).

 

I suspect it is the former because most SHLD bulls would have pegged the value of the SRG properties (a well above-average slice of the entire store portfolio) at more than $75 per SF. Although he clearly thinks Eddie can shrink the retail operations and get them back in the black, a $9 billion value seems silly (especially if you are excluding the KCD royalties and the profits from the auto centers and extended warranties), even by Fairholme's standards.

[valueinvestor82]

Very clever, Peridot. Let me guess, you excluded long term leases in your assumptions behind real estate values? What I know is that SRG comprises roughly 20% of the total, yet you assign $4 billion to the remaining 80%? Even S&P in their debt upgrade mentioned the remaining real estate is worth more than many give credit for. Berkowitz brought up the inconsistency of analysts praising M's real estate while not applying the same reasoning to SHLD.

[CorpRaider]

If memory serves, he dumped Orchard as soon as it was spun, so I doubt he's counting that as zero. 

[ni-co]

Actually, I think the SRG deal ($75/sf) shows that Fairholme has overvalued the real estate. The thesis Bruce has stated repeatedly is that the "other" assets (brands, home services, auto centers, warranty, Canada, etc) net out all of the liabilities. Therefore, the conclusion was that the value of real estate plus the core Sears and Kmart retail operations were worth more than $150/share.

 

After the SRG deal ($29/share of proceeds) he still thinks SHLD is worth $125/share, or $13 billion. Therefore, either 1) he is overvaluing the real estate, or 2) his real estate values are right and he thinks the retail operations today are worth $9 billion (the remaining real estate is worth about $4 billion at $75/sf).

 

I suspect it is the former because most SHLD bulls would have pegged the value of the SRG properties (a well above-average slice of the entire store portfolio) at more than $75 per SF. Although he clearly thinks Eddie can shrink the retail operations and get them back in the black, a $9 billion value seems silly (especially if you are excluding the KCD royalties and the profits from the auto centers and extended warranties), even by Fairholme's standards.

 

I think Berkowitz isn't including any goodwill for the retail operations but I think he values the brands etc. on a going concern basis. He clearly thinks that there's still MOS in the REIT RE valuations – otherwise he wouldn't have subscribed. This is also the logic behind a rights offering – ESL has to structure it at least as a modest bargain, otherwise he wouldn't have been able to raise enough money.

 

I tend to disagree that SRG contains a "well above-average slice" of Sears' RE. What's your opinion on slide 27 of the latest earnings presentation? If I take a Pareto distribution as a basis I can't share your conclusion that the majority of the RE value now resides within SRG.

 

Let me guess, you excluded long term leases in your assumptions behind real estate values? What I know is that SRG comprises roughly 20% of the total, yet you assign $4 billion to the remaining 80%?

 

I agree. You can't simply ignore the long-term leases (if you did so). ESL sold some of them off in the past and received substantial amounts from landlords. Berkowitz regards them as ownership equivalents. While you'd have to go through them on a case-by-case basis I think this is work Berkowitz has actually done.

[peridotcapital]

Very clever, Peridot. Let me guess, you excluded long term leases in your assumptions behind real estate values? What I know is that SRG comprises roughly 20% of the total, yet you assign $4 billion to the remaining 80%? Even S&P in their debt upgrade mentioned the remaining real estate is worth more than many give credit for. Berkowitz brought up the inconsistency of analysts praising M's real estate while not applying the same reasoning to SHLD.

 

The leases aren't very material to the valuation. If you are very generous with your assumptions you can get to a value of $10-$15 per SHLD share, but there's a problem. Unlike owned stores, you can't monetize the leases and keep the stores open. So, if you are doing a sum of the parts valuation with real estate plus retail operations, as Fairholme is doing, you can't double count (either the leases are worth X or the store's operations are worth Y - you can only pick one). So even if you value the leases at $15 per share, you have to close down hundreds of stores and you lose the retail value that Fairholme is assuming in the turnaround plan (revenue from leased Kmarts is about 40% of SHLD's total annual revenue).

 

Here's the other problem; 80% of the leases are Kmarts. In fact, Kmart leases represent about 50% of SHLD's operating store base. Treating owned Sears stores and leased Kmart stores as remotely comparable (as people do when they argue that "SRG was only 20% of the store base and they got $3B for those, so the other 80% must be worth $12B) simply doesn't hold up to scrutiny. For example, if 50% of the store base is leased Kmarts and we generously assign a value of $10/sf to those leases, you arrive at a value of $7 per SHLD share for half of the company's entire store base.

[peridotcapital]

If memory serves, he dumped Orchard as soon as it was spun, so I doubt he's counting that as zero.

 

Actually, both he and Eddie rode OSH all the way down...

[peridotcapital]

 

I tend to disagree that SRG contains a "well above-average slice" of Sears' RE. What's your opinion on slide 27 of the latest earnings presentation? If I take a Pareto distribution as a basis I can't share your conclusion that the majority of the RE value now resides within SRG.

Like you said with the leases, you have to do a store by store analysis. I estimate that the SRG properties represented a majority (60%+) of the owned store value. Given how many crown jewels went with SRG (Aventura, Washington Square, etc), I don't see any possibility that the remaining stores are better, on average, than the SRG properties. In my most conservative model I use the same value for the remaining stores as the sold ones.

 

 

 

 

[krazeenyc]

Yes. Shows you that the market reaction was a bit over the top. Dropped as if it were a spin-off. Wouldn't you say that Berkowitz was about right re the values of the Seritage RE?

 

Actually, I think the SRG deal ($75/sf) shows that Fairholme has overvalued the real estate. The thesis Bruce has stated repeatedly is that the "other" assets (brands, home services, auto centers, warranty, Canada, etc) net out all of the liabilities. Therefore, the conclusion was that the value of real estate plus the core Sears and Kmart retail operations were worth more than $150/share.

 

After the SRG deal ($29/share of proceeds) he still thinks SHLD is worth $125/share, or $13 billion. Therefore, either 1) he is overvaluing the real estate, or 2) his real estate values are right and he thinks the retail operations today are worth $9 billion (the remaining real estate is worth about $4 billion at $75/sf).

 

I suspect it is the former because most SHLD bulls would have pegged the value of the SRG properties (a well above-average slice of the entire store portfolio) at more than $75 per SF. Although he clearly thinks Eddie can shrink the retail operations and get them back in the black, a $9 billion value seems silly (especially if you are excluding the KCD royalties and the profits from the auto centers and extended warranties), even by Fairholme's standards.

 

The $75 per square foot is not an accurate way to value the properties that are in SRG. WHY? Because there are severe restrictions on the properties that drastically depress the value of the real estate.

 

For example is SHLD wants they can pay under market rent for ~1/2 the space.

If SRG wants to FORCE SHLD out they need to pay additional compensation to SHLD.

SHLD can DUMP large amount of space (~20% annually ) with no penalty.

If SRG wants to take over entire stores they still need to make additional payments to SHLD.

 

It's like buying a rent controlled property vs a standard apartment. When you buy a property with a rent controlled tenant in place the price is going to be very depressed vs regular market price.

[adesigar]

BB's update on SHLD's NAV:

 

The market price of Sears Holdings Corporation (7.1% of the Fund portfolio) reflects intense skepticism about the company’s net assets and ability to transform its operating business. Since the Fund initiated its investment, Sears has distributed $31.85 to its shareholders via spin-offs and other corporate actions. Most recently, Sears sold 235 properties, plus joint venture interests in 31 additional properties, for $3.1 billion in cash proceeds. While the market is still digesting the facts associated with this recent separation transaction, our updated sum-of-the-parts valuation exceeds $125 per share fully diluted, net of debt. We expect the company’s focus on “profitability instead of revenues” to result in operational efficiencies, expense reductions, and gross margin improvement.

 

http://www.fairholmefunds.com/s/FAIRX-Semi-Annual-Report.pdf

 

Always comical to see him continuing to defend this position. I would love to see the values he assigns Sears and Kmart in this SOTP analysis. I think he needs a new Sears analyst. Can anyone back into the $31.85 figure he cites? I can't get close and this should be an easily verifiable number. Maybe I forgot something, but here is what I have in my files:

 

2011 Orchard Supply Spinoff: zero value (filed for bankruptcy in 2013)

2012 Hometown Rights Offering: negative value (priced at $15.00)

2012 Partial Canada Spinoff: ~$5 per SHLD share (including special dividends)

2014 Lands End Spinoff: ~$7 per SHLD share

2014 Partial Canada Rights Offering: negative value (priced at $9.50)

2014 Notes/Warrants Rights Offering: ~$3 per SHLD share

2015 Seritage Rights Offering: ~$5 per SHLD share

 

Add all of that up and you get ~$20 per SHLD ($17 if you count the two bad rights offering as negatives instead of zeros). Even if you are more generous and assume a holder sold every distribution upon receipt you only get a total of ~$24 per SHLD share.

 

Am I forgetting something or are the verifiable assertions Fairholme publishes not even accurate?

 

SHOS traded up into the 50s.

SRSC traded into the teens

LE traded into the 50s

Notes and Warrants - Notes went over 100 and Warrants into the 20s.

 

If you didn't sell anything and held everything only then your calculations might work but people sold at different prices.

My guess is his calculations are based on what FAIRX fund received based on the prices at which he sold. Everyone will have different amounts.

 

I personally sold most of my SHOS in the high 30s-low 40s. Still have an odd lot left.

Sold Lands End when I got the shares so around 30's

Sold Warrants when they crossed 100 so have free Rights

Sold Sears Canada rights and bought Sears Canada on pink sheets (SEARF) for  $8.

Sold SRG at 39 bought more SHLD.

 

 

[adesigar]

http://www.sec.gov/Archives/edgar/data/1214344/000091957415005575/xslF345X03/p6736962.xml

 

based on this filing it looks the the warrant's strike price is $25.686

 

Thanks for finding that and linking it.

[peridotcapital]

 

The $75 per square foot is not an accurate way to value the properties that are in SRG. WHY? Because there are severe restrictions on the properties that drastically depress the value of the real estate.

 

For example is SHLD wants they can pay under market rent for ~1/2 the space.

If SRG wants to FORCE SHLD out they need to pay additional compensation to SHLD.

SHLD can DUMP large amount of space (~20% annually ) with no penalty.

If SRG wants to take over entire stores they still need to make additional payments to SHLD.

 

It's like buying a rent controlled property vs a standard apartment. When you buy a property with a rent controlled tenant in place the price is going to be very depressed vs regular market price.

 

If the SRG stores were really being sold at far below market values due to the lease terms, one would expect that the returns the mall operators would make on the redevelopment projects to be extremely impressive (far above their "average" project). But that is not the case at all. Macerich has said that they expect a 6% ROI on their Sears JV redevelopment projects (9 stores in malls that are averaging sales of $680/sf). If they are really buying space in these stores for well below market value, their ROI would be far higher than 6% on the space they are recapturing right away.

 

But even if we ignore that fact, the price SHLD can get for the stores is really all that matters to investors. If they want to do another transaction a year from now with another 100 stores, they are going to get a similar price. And even if Eddie decides to close a store entirely, he is not going to have much negotiating leverage (there is only 1 bidder for that box). If Macerich, for example, can only make 6% on a big box redevelopment, how would SHLD be able to squeeze much more money out of them? Doing so would drag the ROI below their cost of capital fairly quickly.

[krazeenyc]

 

The $75 per square foot is not an accurate way to value the properties that are in SRG. WHY? Because there are severe restrictions on the properties that drastically depress the value of the real estate.

 

For example is SHLD wants they can pay under market rent for ~1/2 the space.

If SRG wants to FORCE SHLD out they need to pay additional compensation to SHLD.

SHLD can DUMP large amount of space (~20% annually ) with no penalty.

If SRG wants to take over entire stores they still need to make additional payments to SHLD.

 

It's like buying a rent controlled property vs a standard apartment. When you buy a property with a rent controlled tenant in place the price is going to be very depressed vs regular market price.

 

If the SRG stores were really being sold at far below market values due to the lease terms, one would expect that the returns the mall operators would make on the redevelopment projects to be extremely impressive (far above their "average" project). But that is not the case at all. Macerich has said that they expect a 6% ROI on their Sears JV redevelopment projects (9 stores in malls that are averaging sales of $680/sf). If they are really buying space in these stores for well below market value, their ROI would be far higher than 6% on the space they are recapturing right away.

 

But even if we ignore that fact, the price SHLD can get for the stores is really all that matters to investors. If they want to do another transaction a year from now with another 100 stores, they are going to get a similar price. And even if Eddie decides to close a store entirely, he is not going to have much negotiating leverage (there is only 1 bidder for that box). If Macerich, for example, can only make 6% on a big box redevelopment, how would SHLD be able to squeeze much more money out of them? Doing so would drag the ROI below their cost of capital fairly quickly.

 

That's b/c they don't get the whole store. They are not getting the properties free and clear -- they are essentially getting 50% of the properties.    They can redevelop 1/2 the store and are renting out the other half at a price they would never consider in a free market deal.  If they want to get the other half they'll have to pay SHLD -- just as they they've had to pay SHLD in the past. If you look at similar stores that Sears sold in their entirety (use columbiana as a great example) they got a far higher $ per square foot.  Keep in mind Columbiana is a bottom end A mall. Not nearly the quality mall that the Macerich JVs include.

[peridotcapital]

 

SHOS traded up into the 50s.

SRSC traded into the teens

LE traded into the 50s

Notes and Warrants - Notes went over 100 and Warrants into the 20s.

 

If you didn't sell anything and held everything only then your calculations might work but people sold at different prices.

My guess is his calculations are based on what FAIRX fund received based on the prices at which he sold. Everyone will have different amounts.

 

I personally sold most of my SHOS in the high 30s-low 40s. Still have an odd lot left.

Sold Lands End when I got the shares so around 30's

Sold Warrants when they crossed 100 so have free Rights

Sold Sears Canada rights and bought Sears Canada on pink sheets (SEARF) for  $8.

Sold SRG at 39 bought more SHLD.

 

That certainly could explain it, but the way he wrote it didn't sound anything like that. Thanks.

[Picasso]

So why would Eddie use a lot of the raised cash to tender the 2018 secured debt?  The rate of 6.75% is a lot lower than their recently issued 2019 note.  Based on where the debt was trading it doesn't make a ton of sense on the surface, unless he is looking to shift the assets around and needed flexibility?

[merkhet]

So why would Eddie use a lot of the raised cash to tender the 2018 secured debt?  The rate of 6.75% is a lot lower than their recently issued 2019 note.  Based on where the debt was trading it doesn't make a ton of sense on the surface, unless he is looking to shift the assets around and needed flexibility?

 

I'm cribbing this from someone else, but basically the 2018 debt requires repayment within 12 months of a large event like the sale-leaseback and the 2019s can be used to exercise payment of the warrants, so that's probably why he is focused on the 2018s and not the 2019s.

[abitofvalue]

 

I know retail ops are shrinking and that is the strategy but this still surprised me --  On the retail operations side - per Rob Wilson (retail analyst) -

 

SHLD has now reported negative comparable sales for 52 of the 58 quarters since FY 2001 for Sears

 

:o :o