SHLDQ - Sears Holdings Corp

[BTShine]

Ourkid8, I believe it's not his deputies.  It's his personal account.  Not affiliated with Berkshire Hathaway. 

 

Similar to Bezos buying the Washington Post.

[undervalued]

This Buffett investment makes complete sense. You basically only need to think a little bit about these 3 points from the last press release:

 

• Third-party tenants other than Sears Holdings Corporation (“Sears Holdings”) represented 22.0% of annual base revenue, including all signed leases
  
• Base rents across the portfolio averaged $18.95 PSF for signed but not yet opened leases, $11.23 PSF for existing third-party leases and $4.31 PSF for Sears Holdings
  
• Total annual NOI is approximately $196.0 million, including all signed leases
  

 

http://ir.seritage.com/file/Index?KeyFile=31850567

 

I can't believe that I missed this. On average, they rent to new tenants at 4x the price Sears pays. People are talking about single tenant risk at SRG. I'd argue that your risk is quite limited if you can quadruple your income on average in case your main tenant goes bust.

 

How much real estate assets does SHLD still hold and not yet spun off? Why did he decide to invest in SRG instead of SHLD when SHLD is actually cheaper?

[BTShine]

This Buffett investment makes complete sense. You basically only need to think a little bit about these 3 points from the last press release:

 

• Third-party tenants other than Sears Holdings Corporation (“Sears Holdings”) represented 22.0% of annual base revenue, including all signed leases
  
• Base rents across the portfolio averaged $18.95 PSF for signed but not yet opened leases, $11.23 PSF for existing third-party leases and $4.31 PSF for Sears Holdings
  
• Total annual NOI is approximately $196.0 million, including all signed leases
  

 

http://ir.seritage.com/file/Index?KeyFile=31850567

 

I can't believe that I missed this. On average, they rent to new tenants at 4x the price Sears pays. People are talking about single tenant risk at SRG. I'd argue that your risk is quite limited if you can quadruple your income on average in case your main tenant goes bust.

 

How much real estate assets does SHLD still hold and not yet spun off? Why did he decide to invest in SRG instead of SHLD when SHLD is actually cheaper?

 

I thought about this today and believe it's because SRG is a clean situation.  It's clear the purpose of the entity and there's also proof that things are going in the right direction.  With SHLD there's a pension obligation (among other debts) and the entity is losing cash every quarter, so that's a much more 'hairy' situation. 

[ni-co]

Why did he decide to invest in SRG instead of SHLD when SHLD is actually cheaper?

 

I'm quite sure that this is the wrong question. Most probably, this is a plain-vanilla real estate investment and has (almost) nothing to do with Buffett's view on SHLD - if he holds a view at all. As mentioned, SRG shareholders would probably benefit from a SHLD bankruptcy.

[ATLValue]

This Buffett investment makes complete sense. You basically only need to think a little bit about these 3 points from the last press release:

 

• Third-party tenants other than Sears Holdings Corporation (“Sears Holdings”) represented 22.0% of annual base revenue, including all signed leases
  
• Base rents across the portfolio averaged $18.95 PSF for signed but not yet opened leases, $11.23 PSF for existing third-party leases and $4.31 PSF for Sears Holdings
  
• Total annual NOI is approximately $196.0 million, including all signed leases
  

 

http://ir.seritage.com/file/Index?KeyFile=31850567

 

I can't believe that I missed this. On average, they rent to new tenants at 4x the price Sears pays. People are talking about single tenant risk at SRG. I'd argue that your risk is quite limited if you can quadruple your income on average in case your main tenant goes bust.

 

+1

 

I have to admit that I've been a little skeptical of some of the cloning discussions on this forum. That said I gladly bought some shares after seeing this headline and doing some digging of my own!!!

[ATLValue]

any thoughts on what the yield might be and when that announcement is coming?

[benhacker]

Regarding Buffett buying SRG vs. SHLD.

 

We don't *know* that he hasn't invested in SHLD directly.

 

SRG was disclosed because he breached the filing requirement for an individual name.  Warren E Buffett isn't required to file a holding report, so unless he has to file a 13G you have no idea what he does or doesn't own (in the US).  SHLD has twice the Market Cap of SRG, so he could have a larger position there, and still not have to file (side note, I own no SHLD common, but *if* Buffett filed as a 5% owner of SHLD, I bet the stock goes up 200% the same day... it would be amazing... hahah...)

 

Just my 2 cents.  I highly doubt Buffett is buying SHLD, but we don't know until he gets to 5% of any individual name (again, regarding his personal portfolio), and I would say my odds of Buffett owning or buying SHLD are higher today than I would have thought yesterday.

 

SSRAP at 11... I patiently await whatever new bizarre action ESL / BB take to make this thread even longer...

[Picasso]

Looks like Buffett bought around a 6% cap rate.  That's probably the best indication we've had of intrinsic value on the better real estate that Sears holds.

 

If the majority of the space is released, he might be looking at a 12% cap rate.  You have to discount the time it takes to get there, but the downside does seem small and you can easily get a 50-100% gain from $36 or so. 

 

I wouldn't want to be short SHLD after this news.

[ni-co]

Looks like Buffett bought around a 6% cap rate.  That's probably the best indication we've had of intrinsic value on the better real estate that Sears holds.

 

If the majority of the space is released, he might be looking at a 12% cap rate.  You have to discount the time it takes to get there, but the downside does seem small and you can easily get a 50-100% gain from $36 or so. 

 

I wouldn't want to be short SHLD after this news.

 

Since SRG is leveraged by almost 50% – I think you can double the potential returns.

[Picasso]

I dunno.  Say you get $300 million of NOI in a few years.  At a 6 cap you're looking at a $5 billion EV.  Taking out the debt leaves you with $3.8 billion of equity on 54 million shares.  That's a $70 equity price.

 

That assumes we're still at 6 caps in a few years. 

[ni-co]

I dunno.  Say you get $300 million of NOI in a few years.  At a 6 cap you're looking at a $5 billion EV.  Taking out the debt leaves you with $3.8 billion of equity on 54 million shares.  That's a $70 equity price.

 

That assumes we're still at 6 caps in a few years.

 

Why 54m shares? As of the latest 10Q there should be 33.18m in total shares outstanding.

 

Keep in mind that SRG has the right to reclaim 50% of all the space Sears leases immediately – that's also true for the joint ventures. If they can quadruple the rents for those spaces my back of the envelope calculations tell me that NOI should be ~350m p.a. in the near to mid term (including 50% of the joint ventures' estimated NOI). 350m @ 6% cap rate = 5.8bn RE value. Subtract 1.2bn in mortgage and other debt = 4.6bn equity value per 33.18m shares = $138 per share within the next, say 3-5 years.

 

Sure, it'll take time to prepare the spaces and find new tenants. But 3-5 years should be more than enough time.

 

There is more upside: SRG can terminate leases for 21 specified Sears properties for a one-time payment. Further, Sears is allowed to terminate leases early for a one-time payment equivalent to 12 months of lease payments. Plus, after 20 years, Sears has to pay market rates for all of their leased space.

 

So, I'd say paying a 6% cap rate on the present lease payments is a – very – good deal. Show me wherelse you can buy a diversified RE portfolio with such upside for this price.

[Picasso]

You're ignoring the operating units that were created to keep this structured as a REIT. That's why the total share count is around 54 million. So upside on your NOI is closer to $80.

 

There is also the risk of fraudulent conveyence in case Sears goes under. Buffett buying seems to imply he doesn't think that is a risk. But if it happens you'll end up back at the offering price of $29.

 

It's going to take a lot of time to release at those higher rates. If it was that easy Sears would have done it already.

 

You are also an 80% creditor to Sears by owning Seritage. Sears isn't a good credit.  Even if it's 20% Sears exposure in five years, that's a lot of exposure to deep junk credit for a REIT.

 

This is also a mall REIT. Mall REIT's are trading at higher cap rates because they're losing traffic over time. There's some pretty deep B-malls in the Seritage portfolio.

 

I spoke with the owners of the Aventura mall about the Sears location. They actually have the right to isolate the Sears anchor from the rest of the mall. For that reason it is going to be tricky for Seritage to easily extract value. Just goes to show this isn't as easy as releasing at 4x the rates that Sears is paying.

 

Anyway I like SRG in the $35 area because it's not a ton of risk especially if they show 15% NOI growth for a while. But if you think this should be worth $80-135 today I think that's crazy. Not to say it won't get there soon now that the Buffett followers are thinking they're going to release at 4x spreads across the whole portfolio. 

 

Anyone have any views on management of Seritage? 

[ni-co]

You're ignoring the operating units that were created to keep this structured as a REIT. That's why the total share count is around 54 million. So upside on your NOI is closer to $80.

 

There is also the risk of fraudulent conveyence in case Sears goes under. Buffett buying seems to imply he doesn't think that is a risk. But if it happens you'll end up back at the offering price of $29.

 

It's going to take a lot of time to release at those higher rates. If it was that easy Sears would have done it already.

 

You are also an 80% creditor to Sears by owning Seritage. Sears isn't a good credit.  Even if it's 20% Sears exposure in five years, that's a lot of exposure to deep junk credit for a REIT.

 

This is also a mall REIT. Mall REIT's are trading at higher cap rates because they're losing traffic over time. There's some pretty deep B-malls in the Seritage portfolio.

 

I spoke with the owners of the Aventura mall about the Sears location. They actually have the right to isolate the Sears anchor from the rest of the mall. For that reason it is going to be tricky for Seritage to easily extract value. Just goes to show this isn't as easy as releasing at 4x the rates that Sears is paying.

 

Anyway I like SRG in the $35 area because it's not a ton of risk especially if they show 15% NOI growth for a while. But if you think this should be worth $80-135 today I think that's crazy. Not to say it won't get there soon now that the Buffett followers are thinking they're going to release at 4x spreads across the whole portfolio. 

 

Anyone have any views on management of Seritage?

 

Yes, thanks, I overlooked the partnership structure – my bad. It certainly makes it less of a no-brainier. Apart from that, I didn't say 138 today but 3-5 years from now because I know or certainly can imagine that it's not that easy. Do you think the 4x rent they receive for the new leases is wildly above the average of what they could charge for the rest of the to be freed-up space?

[Picasso]

Oh yeah 4x is way too high. It's probably closer to 2.5x what Sears is paying.

[smj]

Ben Schall was young star at VNO retail and a protege of Sandeep Mathrini who is now CEO of GGP.

 

It's no coincidence that when RSE was spun off from GGP Andy Silberfien (who worked with Mathrini at Forest City previously) was named President & CEO and Schall leaves VNO to become COO.

 

Then when SHLD spins of Seritage, Mathrini recommends Schall for the top job. GGP then forms one of the mall JV's and SPG & MAC follow. Also, in addition to the JV's SPG & GGP made equity investments at the offering price in it, albeit not substantial based on their size.

 

Its like a football coaching tree with Steve Roth (CEO of VNO) leading the way followed by Mathrini and Schall.

 

I am not familiar with any of the other members of the management team

[DTEJD1997]

Hey all:

 

I'm sure a lot of you have already seen this, but I'm including the link for those that haven't...

 

Business Insider has a slide presentation of some SHLD stores & malls.  Really quite shocking.

 

In distant years past, I was actually at a couple of those locations....

 

http://www.businessinsider.com/photos-of-deserted-sears-stores-2015-12

[Evolveus]

Sears recent insider purchases and sales.  No position. 

Untitled.pdf

[Pelagic]

Sears recent insider purchases and sales.  No position.

 

What's the point of Fairholme buying and selling lots of SHLD shares on the same day? Are they selling higher cost lots for tax purposes? They and Lampert have certainly added a lot recently.

[tooskinneejs]

Couple of recent Sears shopping anecdotes:

 

Was buying pump saver for a power washer recently.  Price tag on the shelf seemed shockingly high, so I asked the clerk to check the price in the computer.  The actual price was much lower and the clerk said that corporate changes prices on things so often that store employees don't even bother to update the price tags on the shelves anymore.

 

Bought a "refurbished" socket wrench set online recently for pickup at a local store.  The cost was $32.  Brand new, this set would have cost about $115.  Upon arrival, they handed me a brand new $199 set because they couldn't find the refurbished set I ordered and paid $32 for.

 

 

 

 

[John Hjorth]

Couple of recent Sears shopping anecdotes:

 

Was buying pump saver for a power washer recently.  Price tag on the shelf seemed shockingly high, so I asked the clerk to check the price in the computer.  The actual price was much lower and the clerk said that corporate changes prices on things so often that store employees don't even bother to update the price tags on the shelves anymore.

 

Bought a "refurbished" socket wrench set online recently for pickup at a local store.  The cost was $32.  Brand new, this set would have cost about $115.  Upon arrival, they handed me a brand new $199 set because they couldn't find the refurbished set I ordered and paid $32 for.

Sounds like a great place to shop! It's a pitty - for me, among others -, that SHLD hasen't gone global. It seems management is not in contact with employees, and it seems business mindset is not part of employee equation.

[Evolveus]

My anecdotal shopping experience with Sears Parts & Service was eye-opening for me.  I'll spare you the details, but in a nutshell, we were trying to get two fridge doors replaced.  It took them over 3 months, 3 technicians, and they sent 6 doors total to us in the process.  It was almost surreal how confused the organization was internally.  It was an experience that was bad enough that I actually filed a report with the BBB as we were mistakenly charged for the unneeded doors they kept sending.  After several months of frustrating phone calls being sent into the corporate black hole we finally got refunded. 

 

I realize that that potentially doesn't mean much about SHLD as an investment, but I was genuinely dumbfounded at the degree of inefficiency and confusion that we dealt with across multiple departments. 

[DTEJD1997]

Hey all:

 

Anybody else a member of "shop your way"?  I am.  I am now getting up to 4 emails a day with various offers and emails telling me what my point level is.

 

I appreciate getting a great offer now & again, but the frequency of emails is now getting silly & annoying.  If it gets any worse, I will probably drop out of the program or suspend all email activity.

 

Anybody else getting tons of email offers?

[adesigar]

Sears recent insider purchases and sales.  No position.

 

What's the point of Fairholme buying and selling lots of SHLD shares on the same day? Are they selling higher cost lots for tax purposes? They and Lampert have certainly added a lot recently.

 

I think the shares are sales from managed accounts for tax. The purchases are in managed accounts and in the Funds.

[adesigar]

Hey all:

 

Anybody else a member of "shop your way"?  I am.  I am now getting up to 4 emails a day with various offers and emails telling me what my point level is.

 

I appreciate getting a great offer now & again, but the frequency of emails is now getting silly & annoying.  If it gets any worse, I will probably drop out of the program or suspend all email activity.

 

Anybody else getting tons of email offers?

 

Go to Account-> More-> Contact Preferences and uncheck the emails you don't want to receive.

 

[FCharlie]

Hey all:

 

Anybody else a member of "shop your way"?  I am.  I am now getting up to 4 emails a day with various offers and emails telling me what my point level is.

 

I appreciate getting a great offer now & again, but the frequency of emails is now getting silly & annoying.  If it gets any worse, I will probably drop out of the program or suspend all email activity.

 

Anybody else getting tons of email offers?

 

 

I get tons of offers on their site. Shop Your Way is actually a pretty rewarding program if you use it. I manage a lot of rental properties so I'm buying appliances frequently. By spending $2,000 in one year I became a VIP member of SYW and now I get flooded with deals like $4.99 oil changes and tons of bonus points every time I buy anything. They also offered me a year of unlimited free shipping for $19.

 

The number one problem with Shop Your Way is that it's connected to Sears and Kmart. I understand that mobile and online shopping is the future, but I always wished Eddie would have just kept milking the stores for cash and gone 100% into the redevelopment of the real estate. All that cash that was flushed away by Shop Your Way could have paid for so many of those large projects like Rice Street in Minnesota, or Burnaby in Canada. Those could have been billion dollar properties.