Beleaguered retailer Sears Holdings Corporation announced that it was investigating the possibility of initiating a REIT transaction that would involve between 200 and 300 of its existing properties.
The company is looking to initiate a rights offering to its shareholders, and they couldn’t be more excited about the possibility. Once the news was made public, Sears’ stock price rose a surprising $13 per share to a price of more than $45.50.
In recent years, Sears Holdings Corp. has struggled to remain profitable in an evolving marketplace and to present a format that is relevant to today’s consumers. Despite attempts by both Kmart and Sears to improve performance by offering product lines endorsed by celebrities like Martha Stewart, Sears Holdings Corp. continues to flounder. Already this year, 210 of the company’s Sears and Kmart stores have either been closed or identified for closure. Before Christmas this year, Sears and Kmart will lay off, at minimum, 5,450 employees and will close more than 100 Kmart, Sears and Sears Auto Center locations. Stores in all of the company’s markets are failing to performing, but the areas hit hardest by layoffs and store closures will be Indiana, Pennsylvania, and Michigan.
Sears is pursuing several different strategies to try to turn the company around. In some markets, the company is redeveloping existing properties into multi-use lifestyle villages that combing entertainment, retail, dining, and office space. The proposed REIT conversion is yet another way to return the company to profitability. Sears is looking to improve its financial flexibility and asset liquidity through a conversion, and it stands to realize a significant financial gain if it is able to complete the REIT transaction. Ideally, Sears Holdings is looking for a sale-leaseback opportunity that would allow its stores to continue to operate while minimizing the parent company’s financial risk in operating these stores.
Under the terms of the proposed REIT selloff, Sears Holdings would select a group of stores to be sold off to a newly-created real estate investment trust. The Sears, Sears Auto Center and Kmart locations sold to the REIT would continue to operate under master leases. The company will distribute rights to its shareholders, allowing them to purchase shares of common stock in the new REIT.
While Sears Holdings Corporation has already filed its request for a conversion with the United States SEC and stock prices have jumped in anticipation of the proposed selloff, the company has emphasized the fact that such a transaction is not guaranteed at this time unless Sears can reach an agreement with a REIT on satisfactory financial terms.