It seems that, for the most part, investors and analysts have come around to the value proposition put forth by Eddie Lampert's Sears Holdings (SHLDQ). The beleaguered department store chain will not likely see a substantial retail turnaround worthy of continued stock price gains, but its underlying assets have nearly no reason not to drive the company up. Analysts and hedge fund managers have chimed in as to the unbelievable value in the company's real estate, as well as efforts taken by management to begin monetizing these properties. Though the stock has run up more than 40% since the early days of 2013, there is good reason to believe that Sears Holdings may have a long, long way to run.
Pile of bricks
It is by no means news to say that Sears sits on a tremendous portfolio of commercial real estate -- more than Simon Property Group, the biggest real estate company in the world. It is also known to many that Sears' liquidation value outweighs its current stock price by a substantial margin; however, the market has not awarded a higher price because it believes management seems to have little interest in closing the retail doors. Those closer to Lampert understand that the hedge fund manager and head honcho at Sears is more than willing to look at break-up value if need be. Still, there are more compelling elements to the story.
The only relatively new piece of news regarding the company's real estate portfolio is its current monetization and what it means for shareholders. This doesn't have much to do with deleting the Sears imprint on the American retail landscape, but instead redevelopment and subdivision leasing.
Wheels in motion
As evidenced by an extensive report by Baker Street Capital, a large shareholder in the company, Sears management is putting into action real estate monetization efforts. The company is subleasing its anchor locations in various markets, taking advantage of a period in which retailers and REITs are hungry for Class A retail space and the supply is weak. For some of these stores, this means having a smaller Sears store as an anchor (with a core-product-oriented focus), and then leasing the freed-up space to smaller retailers.
Other examples include focusing on stores that are prime for redevelopment into mixed-use facilities -- retail, office, and residential space.
How much is all of this worth, and what does it mean for the share price?Estimates vary, but the company has billions upon billions of dollars worth of real estate that it can leverage, with the most valuable real estate (84% of the total, by Baker Street's count) representing just 20% of the properties.
Though the market is aware of Sears' vast real estate, it has yet to recognize the potential of its lease income and redevelopment. In the coming years, expect a company whose retail operations are dwarfed by the income of one of the largest commercial real estate portfolios in existence.
