Sears Holdings (SHLD) on Friday revealed its latest idea for shoring up its pressured finances: forming a real estate investment trust (REIT) for 200 to 300 of the stores it owns that it said could generate “substantial proceeds.”
The idea, which investors like, is that Sears would continue to operate those stores in a sale-leaseback deal, but the real estate itself would be sold via the REIT, with Sears’ shareholders having the right to take a stake. Sears CEO Eddie Lampert is also its top shareholder—his hedge fund ESL Investments owns 48.5% of shares.
Chief Financial Officer Rob Schriesheim said in a statement that if this happened, “we would realize substantial proceeds from such sale, which would further enhance our liquidity.”
The potential move to extract cash out of its real estate is Sears’ latest move to improve its finances in recent months, especially important ahead of the holiday season when it needs to reassure suppliers it can pay them. In October, it announced plans to lease space in some of its stores to fast-fashion company Primark as well as plans to raise $625 million in a debt rights and warrants offering. Prior to that, the retailer, which also owns the Kmart discount chain, announced plans to sell most of its stake in Sears Canada. All told those recent moves were expected to generate about $2 billion in cash by the end of the fiscal year.
Declining sales in recent years has led to a cash hemorrhage for Sears, which has closed dozens of stores in recent years.
REITs must have most of their assets and revenue tied to real estate and pay out 90% of their taxable income as dividends, but generally don’t pay corporate taxes, making them tantalizing for companies. REITs were established in 1960 to give individuals an easy way to invest in income-producing real estate.
Sears’ move has a promising precedent: department store rival Dillard’s (DDS) saw its shares skyrocket in 2011 after it announced its plans to create a REIT. Shares for Sears were up on Friday morning.
Sears’ real estate portfolio is one of its most attractive assets. If it goes ahead with the REIT, Sears Holdings would own between 400 and 500 stores and lease between 1,300 and 1,400 stores.
The prospect of a REIT was welcome news for Sears investors as the retailer again reported poor, though at least stabilizing, quarterly results: for the third quarter, the company expects an U.S. adjusted loss before interest, tax, depreciation and amortization of between $275 million and $325 million, while comparable sales should be down 0.1%, with a small rise at Kmart almost enough to offset at Sears’ U.S. stores.