Meet Eddie Lampert: Real estate mogul.
This story first appeared in the November 10, 2014 issue of WWD. Subscribe Today.
When Lampert’s Kmart Holding Corp. acquired Sears, Roebuck & Co. in 2005 in a deal valued at $11 billion, and then renamed the new firm Sears Holdings Corp., many believed he was interested in just the real estate holdings. After all, what did a hedge fund manager — he owns ESL Investments, which acquired Kmart out of bankruptcy — know about retail and merchandising?
Fast forward nine years and now the cynics finally could be proven right. That’s because the latest idea from Lampert — which is still being considered as an option by the company — involves monetizing Sears’ assets by selling 200 to 300 company-owned Sears stores to a newly created real estate investment trust, with the REIT’s shares to be owned by Sears’ shareholders. Lampert, through ESL, is the majority shareholder of Sears with a 48.5 percent equity stake.
Sears, which first disclosed that it was mulling over the idea of the REIT in a regulatory filing, a Form 8-K, with the Securities and Exchange Commission on Friday, said the transactions would involve sale-leasebacks. It’s a move that allows Sears Holdings to reduce its investment in the land and building structures, retain the sites for its stores, and still generate cash to enhance its liquidity position. The company said if it went ahead with the idea, Sears would own about 400 to 500 stores and lease 1,300 to 1,400 stores, including those part of the sale-leaseback sites in the REIT.
Investors, even though a final decision has yet to be made, cheered the news at the start of Friday’s trading session, sending the stock up 30.7 percent and then even higher in intraday trading to as high 47.7 percent ahead. The stock settled up 31 percent to $42.81. Over 11.5 million shares changed hands, compared with a three-month average volume of 1.6 million.
Investors have reason to be happy about the possibility of a REIT. For the REIT to stand on its own, it’ll likely hold the better sites that are currently in Sears’ portfolio. Should Sears down the road file a petition for bankruptcy, the better store assets are already out of the hands of creditors. And if Sears were to liquidate in a bankruptcy scenario, the REIT can lease the sites to other retailers. The REIT’s shareholders get to reap the benefits of having the better real estate assets as well as a consistent return, given the special tax status accorded to the financial vehicle and that 90 percent of the rental income collected must be passed to shareholders as dividends.
This isn’t the first time Lampert has shown his skills at financial wizardry. In 2006, the company transferred ownership of Sears’ Kenmore, Craftsman and DieHard brands to KCD, a bankruptcy-remote entity. The entity now charges Sears a royalty fee to license the brands. The $1.8 billion securitization bond deal, backed by the brands’ intellectual property, was then sold to a Bermuda-based insurance company that is also a Sears subsidiary, according to an individual familiar with the transaction.
Since forming Sears Holdings, the company under Lampert’s ownership has completed a number of transactions involving Sears’ assets, including Sears Canada’s sale of eight properties a year ago for $300.3 million and the 2012 spinoff of Sears Hometown and its Outlet business, raising $346.5 million from a rights offering and garnering a $100 million cash dividend from Hometown.
But Sears has been having liquidity issues, and its cash burn rate has been a concern for the financial community. That has prompted a flurry of financial maneuvers just this year alone to keep the operations afloat. The latest corporate financial moves include a rights offering for senior unsecured notes and warrants to raise up to $625 million in proceeds, a rights offering for Sears Canada that is expected to raise up to $380 million, a short-term $400 million loan from Lampert’s hedge fund ESL Investments and the leasing arrangement for seven Sears sites to house Primark stores. That’s on top of the Lands’ End spin-off earlier this year that generated a $500 million cash dividend to Sears.