Sears Holdings as a REIT
My most recent post on mall REITs (SPG in particular) got me thinking about Sears Holdings, a company that I disparaged a few weeks ago in a post called, “Unsuccessful Profits.” More particularly, my chart on REIT valuation based on square footage owned made me wonder.
Aas you can tell, price per square foot data can vary quite significantly. Not all square footage is created equal and, ultimately, it’s how you monetize your square footage which really matters. In the case of Sears, though they own a significant amount of retail square footage, the majority is leased to its own businesses which have performed in lackluster fashion to say the least. Despite this, there has to be some assumption of inherent value in the square footage. (This is something I ignored when I made the statement that Sears’ sales declines and lack of investment in its stores was an unsustainable business model.)
The Company’s 10K is a bit opaque as far as square footage controlled. From the information available, I pieced together that the Company is in control of something like 267 million square feet of retail space. However, it only owns 814 of 3,918 stores and classifies 1,061 stores as “independently owned and operated.” Assuming that the Company could only exercise “REIT-like” control over these stores, it’s “REIT valuable” square footage is probably closer to somethign like 100-125 million square feet. At the median price to square foot value above ($35.71 per square feet), we would find the owned real estate of the Sears business valued around $4 billion and, at the average price ($49.44 per square feet), a hypothetical Sears REIT should be worth $5-$6 billion.
Sears is currently trading at $7.9 billion in market cap. The above analysis is admittedly rough and back of the envelope, but it does lend some credence to the idea that Sears is very conservatively valued (possibly undervalued) by the market. Even if my argument that the Sears retail business is unsustainable is true and we were to ascribe zero value to Sears and Kmart retail (a horrible over simplification), the value of the Kenmore, Craftsman, Lands End and various other brands is likely worth at least $1-$2 billion (Sears holds tradenames and intangibles on the books at $3.3 billion). This ascribes an overall value to the business around $6-8 billion in the most draconian of cases.
As long as Sears and KMart underperform and as long as market value for the stock stays at or below this baseline valuation, it does make a significant case for management to spend money buying back stock and otherwise operating to realize value from the real estate as opposed to throwing money at capex to turn around the standard retail business. The question is, with two retail behemoths the likes of KMart and Sears, how exactly can management catalyze the realization of the underlying “REIT” value in the Company’s real estate? And, can this happen in a timeframe quick enough to provide adequate return to investors who might be thinking about going long on SHLD today?
If any out there in the community have more insight on Sears’ real estate holdings and its potential valuation as a REIT, do feel free to chime in. I admit my analysis is cursory at best, but I think it’s directionally correct and does beg further analysis as SHLD is beginning to look like a more compelling stock despite its retail businesses’ poor operating performance.
Full Disclosure: No positions in SHLD at the time of writing.
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