Sears Holdings Corp's REIT An "Interesting" Idea

Sears Holdings Corp (NASDAQ:SHLD) revealed in a regulatory filing this morning that it is considering selling part of its real estate portfolio and setting up a real estate investment trust (REIT). Now analysts are starting to weigh in on the news. Sterne Agee analysts call the idea “interesting” and take a broader look at real estate across the retail industry.

Sears Holdings Corp's REIT An "Interesting" Idea

Details on the proposed Sears transaction

If there’s one thing Sears needs more than almost anything else right now, it’s cash, and the retail chain is looking at monetizing about 200 to 300 of its stores. The retail chain proposes to do the transaction in the form of a sale-leaseback, still operating in the spaces it places in the REIT.

By setting up the REIT, Sears would be able to transition into an “asset-light, integrated retail member-focused company” rather than the “asset-intensive, store-focused retailer” the Sterne Agee analysts say it is right now. If Sears moves forward with the idea, then it would get plenty of cash to improve its liquidity.

The retail chain expects to hand out rights to buy common shares or equity interests to its shareholders in order to pay for a part of the purchase price for the stores. The rest of it would come from debt financing.

A REIT would bring Sears in line with other retailers

In their report dated Nov. 7, 2014, analysts Charles Grom, Renato Basanta and John Parke said there has never been another time when sentiment in the retail space has been as negative as it is right now. They say all this negative sentiment is what’s driving Sears and other players in the space to “become more asset light” and create future value.

They took a closer look at the retail space as a whole and say that among the different types of retailers, the discount chains tend to own greater percentages of their stores. Wal-Mart Stores, Inc. (NYSE:WMT) is at the top of the list, owning 85.5% of its stores and renting the others. Target Corporation (NYSE:TGT) is in second place, with 80.1% of its stores under direct ownership.

As a category, the department store group is in second place, and Macy’s, Inc. (NYSE:M) leads the pack with 68% ownership of its stores. The other major players—J.C. Penney Company Inc (NYSE:JCP), Kohl’s Corporation (NYSE:KSS) and Nordstrom, Inc. (NYSE:JWN) are in the 30%-40% range.


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