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Oct 16, 2018

Sears liquidation would cost landlord half its rent income

Eddie Lampert the main reason that Sears has failed: Retail strategist

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A Sears liquidation would cost its real estate spinoff 47 per cent of its annual rent income, or about $84 million in cash flow, according to regulatory filings.

Seritage Growth Properties, a real estate investment trust, was created in 2015 by Sears Chief Executive Officer Eddie Lampert to be the property owner and landlord for select locations of Sears and its sister chain, Kmart.

As the Sears Holdings Corp. bankruptcy case kicks off in White Plains, New York, this week, the retailer hasn’t reached an agreement with lenders over how many stores -- if any -- will stay open past the holiday season. The company’s chief financial officer in a Monday court filing pleaded for vendors, employees and other stakeholders to help it reorganize in bankruptcy. About 68,000 jobs are on the line.

Rent from 82 Sears properties brings in US$49 million for Seritage, according to a filing. Other property-related expenses paid by Sears would push the loss of cash flow to US$84 million, the REIT said. Other tenants pay a total of US$55 million.

Seritage said in a statement Monday that it’s been steadily trimming its exposure to Sears. It’s been replacing shuttered Sears stores with other retail and, in some cases, residences. The REIT has a wider base of tenants in the pipeline -- it expects an additional US$72 million from leases beginning in the next 24 months -- and historically it’s been able to increase the rent on spaces Sears leaves behind for new tenants.

Future Tenants

But signed lease income includes commitments from future tenants, and of current rent revenue, Sears is a more significant portion, according the REIT’s filing. Sears exposure could create short-term pain for Seritage if too many stores shutter before its new tenants start paying.

“It’s such a large chunk,” said Bloomberg Intelligence analyst Lindsay Dutch. “It’s still over 40 per cent of their rent.”

Seritage didn’t respond to requests for comment.

Lampert’s hedge fund, ESL Investments Inc., is pursuing a deal to provide more bankruptcy financing, while also discussing buying a portion of the company’s outlets. ESL declined to comment.

Five Kmarts

Of the 142 stores Sears says it’s closing, 42 sit on property owned by Seritage. Just five Kmart stores earmarked for closing are part of Seritage’s portfolio.

Three years ago, Lampert raised US$2.5 billion for the chain by selling Seritage about 250 of Sears’s best properties for the retailer to lease back. Though the move attracted its share of controversy, it allowed Sears to turn a short-term profit even as revenue deteriorated. Seritage has gone on to be the one profitable part of the Sears constellation.

The REIT sits on a US$1 billion liquidity cushion after Warren Buffett’s Berkshire Hathaway Inc. loaned it US$2 billion earlier this year. Buffett personally owns a stake of more than 5 per cent in Seritage, according to regulatory filings.

“Even if you imagine a really horrible scenario, it’s not a big issue for Berkshire,” said Richard Cook, a longtime Berkshire shareholder and fund manager in Birmingham, Alabama, who oversees about $360 million.

--With assistance from Katherine Chiglinsky, Tiffany Kary, Noah Buhayar and Allison McNeely