Sears, Macerich Make Headlines

Sears Holdings Corp. has made a third joint venture this month and analysts are abuzz.
Jeff Green, Jeff Green Partners

Jeff Green, Jeff Green Partners

Sears Holdings Corp. has entered into a joint venture with The Macerich Co. as part of Sears Holdings’ continued efforts to enhance its financial flexibility and generate value from its real estate portfolio.

This is the third joint venture Sears has made this month; after partnerships with General Growth and Simon Property Group, generating $858 million for the cash-strapped Sears overall. Macerich contributed $150 million in cash.

“What Sears is doing is unlocking some of the value of their real estate in an effort to continue to operate as a retailer,” Jeff Green, president of Jeff Green Partners, told Commercial Property Executive. “This is a little confusing to me.  Is there a plan at Sears to continue to operate as a viable retailer? If so, what is the strategy? What is going to be Sears defining-difference from other retailers?  To date it certainly hasn’t been its soft-lines. The only brand differentiation that Sears has done well with is in appliances (Kenmore) and tools. That is such a small portion of the total store’s square footage.”

Sears Holdings contributed nine properties where Sears currently operates stores located at Macerich malls to the JV, including property with space leased to third parties. Sears Holdings will lease back from the JV and continue to operate existing Sears Holdings stores at the properties contributed to the JV.

“For Sears, the transaction will have minimal day-to-day impact on customer-facing store operations or the overall shopping experience,” Michael Lagazo, senior advisor, Retail, with commercial real estate advisor Sperry Van Ness, told CPE. “The joint venture transactions make capital available for Sears to deploy or invest in other areas of the retail business.”

According to Lagazo, the lease agreements between the joint venture enable it the ability to optimize the value of recaptured space partly by subleasing to third parties. As an example, Corner Bakery now occupies the northwest corner of the Sears at Westfield UTC in San Diego. Sears has been in discussion with Williams-Sonoma as well as a potential sublessee.

“Similar partnerships allow mall operators to redevelop the anchor spaces, enhance the merchant mix, as well as re-position and optimize the asset by capturing higher rental income ultimately maximizing shopper traffic,” he said. “These types of transactions substantiate the value of department stores and anchor spaces.”

The nine properties being contributed to the JV are located at centers with average in-line sales of $680 per square foot and include some of our top centers including Washington Square, Los Cerritos Center, Arrowhead Towne Center, Vintage Faire Mall, Danbury Fair Mall, Chandler Fashion Center, Freehold Raceway, Deptford Mall and South Plains Mall.

“Since the filing of the registration statement for Seritage Growth Properties a few weeks ago, we have entered into JV agreements with the leading mall operators in the U.S., demonstrating the value of Sears Holdings’ real estate portfolio,” Edward Lampert, Sears Holdings’ chairman & CEO, said in a company statement. “We are pleased to be in a position to unlock substantial value for Sears Holdings shareholders and further facilitate the company’s transformation.”

As for what this means to the industry overall, real estate attorney David Stone Phelps, who is in the Los Angeles office of Akin Gump, said REITS are having a more difficult time deploying capital at least as it relates to new construction and development and they are trying to find new areas for decent returns for investors.

“Growth will come in the form of acquisition and not new development due to an oversupply of retail space, especially in primary markets,” he told CPE. “In short, at least in first-tier markets, growth in the short run will come from acquisition of malls or the REITS or other companies who own them.  The only out-of-ground construction is likely to come from construction in second- and third-tier markets or from acquisition and value added renovation in first-tier markets.”