"Be quick, but don't hurry."-- John Wooden, legendary UCLA basketball coach
Sears Holdings (SHLDQ) is just beginning the process of mining its real estate assets. They sit on some gold mines, some silver mines, as well as a few sites that may not pan out for much -- or will they? That is a multi-billion dollar question.
There has been a sudden flash flood of articles that have come out recently -- some pro Sears, a few not so much, and a few downright scathing. As of the closing bell on Sept. 13, 2013 Sears common stock had risen 27% in just five trading days – gaining over $1.25 billion dollars in market cap. Not bad for a company with declining same store sales, bleeding cash, and allegedly in a death spiral.
In spite of my recent assertion that there is no middle ground regarding Sears Holdings, I tried to present a balanced overview of both the bull and the bear camp views in: "Why Hedge Funds Love This Former Dow Stock."
The Presentation That Stirred Up Wall Street
The catalyst for the quick jump in Sears' stock price turned out to be a 139 page Baker Street Capital Management presentation presenting a positive outlook for Sears Holdings. The report referenced real estate appraisals they commissioned for the entire 240 million square foot Sears real estate portfolio, containing over 2,000 properties.
One powerful conclusion was that the top 350 owned and 50 leased properties are worth at least $7.3 billion -- greater than Sears' market cap of $6.4 billion on Sept 13, 2013. p.6 The subdivision of Sears' best big box retail locations and mall outparcels -- the low hanging fruit -- and marketing this space to national retail tenants is currently under way. Baker Street believes that the redevelopment potential of the top 350 Sears properties actually puts their value closer to $12 billion.
Conservative Baker Street Assumptions
A key assumption of the presentation is that the remaining 1,636 owned and leased stores are only valued at $1.38 billion, or $8 per square foot.
Sears is actively working to create value at hundreds of sites that they have already identified through its Ubiquity Critical Environments initiative. Ubiquity is focused on cell towers and data center locations. The report did not assign a value to these projects.
The potential for the redevelopment of 850 Sears Auto Centers was also excluded.
Is there demand for space?
The largest U.S. REIT is mall landlord Simon Properties (NYSE: SPG). Simon owns interests in 326 properties totally 241 million square feet -- a market cap over $46 billion. A recent Bloomberg article pointed out Simon Properties beat analyst estimates for funds from operations, or FFO, (a measure of REIT cash flow) for the quarter ending June 30, 2013. It also stated that occupancy is at an all time high for regional malls, and that mall owners would love to get back empty big box space to profitably redevelopment and subdivide into smaller shops and restaurants.
Are retail REITs redeveloping prime properties?
Federal Reality Trust (NYSE: FRT) has about 20 million square feet of prime retail properties with a market cap of $6.6 billion. The portfolio is 94.9% leased. CEO Don Wood in an April CNBC interview with Jim Cramer explained that they are spending $1 billion redeveloping and adding residential and office space at three existing properties. They are a conservatively managed REIT that has raised its dividend for 45 consecutive years -- currently yielding 3%.
A Potential REIT Spin-off
Sears Seritage Realty Trust initiative is focused on tailored redevelopment of 200 properties in 33 states totaling about 18 million square feet. The Baker Street report points out that there are few barriers or covenants that would prevent Sears Holdings from spinning out Seritage as a REIT.
An analyst recently estimated that Seritage could be worth about $8 billion, assuming it could generate $30 per square foot with a 7% cap rate. One huge unknown is how many years would be required to make this happen.
A Long Term Value Investing Play
Seritage sites combined with Ubiquity assets, Sears Auto locations, and other selected Sears real estate could result in Sears Holdings stockholders owning shares in a REIT considerably more valuable than the current book value of the entire company.
This is why hedge funds and institutional investors hold most of the stock. Foolish writer Brendan Matthews made an excellent point in his recent article: "... the best way to beat the market is to have an information edge, which can be garnered only through hard work."
