What’s the Story With the Sears Holdings-Simon Properties Deal?

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What’s the Story With the Sears Holdings-Simon Properties Deal?

by Charles Lewis Sizemore, CFA

Sears Holdings Corp (SHLD) made news this week by partnering with mall REIT Simon Property Group (SPG), the largest REIT in the world by market cap.

Sears plans to bundle 10 properties worth about $228 million into the venture, which it will then lease back. Sears made a similar deal with rival mall REIT General Growth Properties (GGP) earlier this month, selling and leasing back 12 properties located in General Growth malls.

Of course, all of this pales in comparison to Sears’ most ambitious move: The planned spinoff of 254 properties worth $2.5 billion into Seritage Growth Properties, a real estate holding and development company. Sears currently owns Seritage, but it is widely believed that Chairman Eddie Lampert plans to list it as a standalone traded REIT.

So  . . .  what’s going on here?

Lampert Nears His Endgame

I’ve been following the developments at SHLD for years, and it appears that this is execution of Lampert’s long-term plan of essentially chopping up Sears — an old retailer that has been dying a slow death for decades — and selling its valuable pieces for spare parts.

Just last year, SHLD spun off its Lands’ End, Inc. (LE) brand. This followed the 2011 spinoff of Orchard Supply and assorted sales of real estate along the way.

Sears stores have been losing ground to more competitive big-box retailers like Wal-Mart Stores Inc (WMT), The Home Depot, Inc (HD) and Target Corp (TGT) for longer than I have been alive. Yet, due to its age and longevity, Sears is sitting on choice retail sites across the country.

Of course, no shoppers visit these sites anymore, but they certainly might if they were rented by higher-quality tenants. At least this was Lampert’s thinking when he bought a controlling interest for $11 billion back in 2004. Though he has never admitted it publicly (it would be bad for business), it was pretty obvious that Lampert had no grand ambition for reviving the Sears retail empire. That would be ludicrous, and Lampert is too smart for that.

Lampert’s game plan was to invest whatever minimal amount was necessary to keep the company afloat long enough for him to extract the value out of it via spinoffs of its valuable brands and real estate assets.

As I wrote years ago in “Is Sears the Next Berkshire Hathaway?” Lampert’s plan probably would have worked well had he not started it immediately before the 2008 crisis and real estate crash.

Is there an investment play here?

Unfortunately, no.

Seritage, were it to go public, might very well turn out to be a decent investment. We’ll have to wait and see there. But the rump Sears Holdings — which today is trading at 2004 levels — is still struggling to turn a profit in a lousy environment for retailers.

When I compared Sears to Berkshire Hathaway years ago, I got a lot of raised eyebrows. But the comparison is completely valid. Warren Buffett has publicly admitted that buying Berkshire Hathaway (BRK-A) was the worst investment of his career and one that probably cost him $200 billion in lost gains.

Once the Sears stores do eventually go out of business — and they will — SHLD, like Berkshire Hathaway, might be a great way for regular investors to invest in the holding company of one of the best managers in the business today.

But in the meantime, you’re looking at a slow bleed.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long WMT and TGT.

This article first appeared on Sizemore Insights as What’s the Story With the Sears Holdings-Simon Properties Deal?