Potential, Peril Abound in Sears-GGP Deal

The news on Wednesday that Sears Holdings and General Growth Partnerships will be forming a joint venture involving the sale-leaseback of 12 properties is no April Fool's joke.

 By Scott Baltic, Contributing Editor 

Jim Costello

Jim Costello, RCA

The announcement early Wednesday that Sears Holdings and General Growth Partnerships will be forming a joint venture involving the sale-leaseback of 12 properties — and that Sears will be creating a new REIT to hold a further 200-some properties — did fall on April 1. Nevertheless, the CRE community is taking this development quite seriously.

In brief, the first transaction will include a Sears subsidiary transferring 12 of its owned properties (some leased to third parties) at GGP malls to the new 50-50 JV and a GGP subsidiary kicking in $165 million in cash. The contributed properties will be leased back from the JV entity under a triple-net master lease agreement running for 10 years, with two five-year renewal options.

In the second transaction, a new REIT, Seritage Growth Properties, will buy about 250 properties from Sears Holdings. What potentially ties the two deals together is that if all goes according to plan, Sears Holdings will sell its 50 percent interest in the JV to Seritage, in parallel with a further $33 million contribution by GGP.

The announcement emphasized Sears’ commitment to continuing to “rationalize its operating footprint” and to moving toward a more “asset-light” configuration. In brief, the transition evidently will include the re-leasing of up to 50 percent of each store to other tenants.

“This deal fits part of a pattern. By our calculations, Sears Holdings has sold about $1 billion of assets in the last decade,” Jim Costello, senior vice president at Real Capital Analytics, told Commercial Property Executive.

Over the past decade, the top purchasers of Sears Holdings assets, in order, have been GGP; Sand Hill Property Co.; AmCap Inc., in a joint venture with Hart Realty Advisors; and Westfield America, with GGP representing just over one half of all the volume from these top buyers, according to Costello. “So the fact that they are reported to be doing this with GGP fits with what Sears Holdings has been doing before.”

Some CRE players might be reminded of the decline and fall of the Mervyn’s department store chain, beginning with an LBO in 2004, and ending in 2008 with allegations that the LBO partners had jacked up rents on the chain’s stores, essentially stripping the company’s real estate. Savvy observers should be watching closely to see whether the rents under the pending Sears sale-leasebacks will be at market rates, or at the kinds of (reportedly) above-market rates that helped kill off Mervyn’s.

Beyond its real estate, Sears has three major assets that are keeping it afloat: the Craftsman tool brand, the Kenmore appliance brand and its auto service business, Garrick Brown, vice president of research, West Region, for DTZ told CPE. If any of those is sold, he predicted, “We’re looking at the final days” of Sears.

Given that Sears has been seeing an annual sales decline of roughly 5 percent for about half a dozen years now, Brown said he would not be too surprised if in five years all that’s left is “a highly profitable automotive chain.”