Seritage Seeks to Reassure Shareholders After Sears Bankruptcy
October 15 2018 - 6:08PM
Dow Jones News
By Soma Biswas and Allison Prang
Seritage Growth Properties, the property company Edward Lampert
carved out of Sears Holdings Corp. three years ago, tried to
reassure investors on Monday that it still has a bright future even
though Sears, its biggest tenant, has filed for bankruptcy.
Seritage sought to persuade investors that it has a sufficient
cash cushion to weather any rent shortfall from Sears. On Monday,
the real-estate investment trust (REIT) told shareholders that $1
billion of cash on hand and the loan it took of up to $2 billion
from Berkshire Hathaway Inc. in August should "cover any cash flow
shortfall we may incur in the near term were Sears Holdings to stop
paying rent."
In 2015, as a way to raise $2.7 billion in cash, Sears spun off
234 stores and its 50% interest in three joint ventures for 28
other stores into a newly listed company: Seritage.
The plan was to gradually re-rent Sears stores to new,
higher-paying tenants.
Last week Seritage shares declined nearly 15% after The Wall
Street Journal first reported last Tuesday that a Sears bankruptcy
filing was imminent. The stock recouped some of those losses
Monday, gaining 3.3%.
On Monday Sears said it plans to close 142 money-losing stores
before year's end, and question marks hang over the fate of
additional unprofitable stores. Of 687 Sears stores, 400 are
profitable, the company said in court filings.
Mr. Lampert, who controls Sears Holdings through his hedge fund
ESL Investments, owns 36% of Seritage shares.
Seritage has been able to find tenants at almost all of the 74
stores Sears closed after Seritage was created in 2015, but most
are only partially rented, with about two-thirds of the space still
vacant, according to a letter Seritage sent to shareholders Monday.
At the same time, Seritage is earning nearly the same amount of
rent on those partially rented stores as it did when Sears was the
tenant, the company also said.
"The quality of real estate for many of these Sears is really
exceptional," said Stenn Parton, chief retail officer at DJM
Capital Management, a real estate developer.
"But taking a space that big -- hundred thousand to
two-hundred-and-eighty thousand square feet of space, it's tough to
find a retail tenant today that can backfill that space," Mr.
Parton noted.
In the long run, a Sears bankruptcy is a good thing for Seritage
because if Sears closes more Seritage-owned stores, the REIT can
lease the space to tenants paying far higher rents, said a top
Seritage shareholder who is not authorized to speak to the
press.
In the near term, though, rental income at Seritage could take a
hit as Sears closes some or all of its stores, the shareholder also
said.
While Sears had been closing stores steadily even before it
filed for bankruptcy on Monday, chapter 11 of the U.S. bankruptcy
code gives it the ability to reject leases and stop paying rent on
stores it intends to shutter, rather than having to wait for leases
to expire.
Sears accounted for 63% of Seritage's rental income at the end
of the second quarter, according to a report last week by RBC
Capital Markets analyst Wes Golladay. The RBC report noted that the
worst outcome for Seritage would be a Sears liquidation.
On Monday, Seritage touted a different statistic. The company
noted that 70% of its income would come from tenants other than
Sears if a number of vacant stores that have already signed up new
tenants but earn no rent today were counted. Seritage expects those
leased but unoccupied spaces to be filled over the next 24 months,
the company said in the shareholder letter.
As of the end of September, Sears was a tenant in 102 of
Seritage's 248 properties, and in another 22 properties Seritage
partially owns through joint ventures, according to securities
filings.
About half of the 144 wholly owned Seritage properties that are
rented to Sears share the space with other tenants, the filings
also show.
Seritage has a significant amount of empty space, however, as
Sears has closed stores rapidly, and many of those stores have yet
to find new tenants or be occupied by ones who have signed
leases.
Seritage has been able to find new tenants that are paying three
to four times the rent that Sears was paying, the company said in
its letter to shareholders Monday.
A spokesman for Seritage declined to comment beyond the
company's statement and its letter to shareholders.
Write to Soma Biswas at soma.biswas@wsj.com and Allison Prang at
allison.prang@wsj.com
(END) Dow Jones Newswires
October 15, 2018 17:53 ET (21:53 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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