Sears Holdings: Seritage Growth REIT - What Investors Need To Know

On April 13, Sears Holdings Corp.

announced its latest real estate joint venture -- essentially a carbon copy of its April 1, announcement of a 12 property JV with General Growth Properties

, which generated $165 million in much needed cash for Sears. This time, it is Fortune 100 mall landlord Simon Property Group

, who is forking over $114 million in cash, while Sears Holding contributes 10 mall Sears stores to a 50/50 JV, valued at $228 million. Similar to General Growth, Simon also agreed to purchase $33 million of the proposed SHLD Seritage Growth REIT (PropCo) spinout, at the same valuation as existing Class-A Sears shareholders will receive through the proposed shareholder rights agreement. • http://www.benzinga.com/news/15/04/5377907/buckle-up-mall-reit-investors Additionally, SHLD announced the sale of a McAllen, Texas mall store location to Simon, price not disclosed. Tale Of The Tape During the past 52-weeks SHLD has traded in a range of $22.45 - $48.25, often spiking significantly on real estate news related to its announced Seritage REIT spin.

In mid-day trading on Monday, Sears Holding shares were up modestly on the news. Seritage Growth REIT - What Investors Need To Know Now that the Simon JV has been announced here is the latest breakdown of Seritage "by the numbers."  Initial contribution: to be 254 store locations, spread across 49 states and Puerto Rico, totaling over 40 million SF, comprised of: 158 Sears brand, 85 Kmart brand and 11 wholly leased to third-parties, valued at ~$2.5 billion.  Recapture provision: Seritage has the right to recapture all of the space in 22 locations, in order to lease to third-parties at higher rents, by paying a lease termination fee to SHLD.  General Growth JV: Sears Holdings 50 percent interest in 12 store JV will be contributed to Seritage. Initial master-lease term of 10 years, with two 5 year options; initial base rent of $17.3 million for JV.  Simon Properties JV: Sears Holdings 50 percent interest in 10 store JV will be contributed to Seritage, with the same master-lease term and options; initial base rent of $13.4 million for JV.  Termination clause: Notably, SHLD can terminate individual store leases if the EBITDA plus rent is less than the annual lease with Seritage; not to exceed 20 percent per year, with a limit on number of JV locations as well.  Dividend policy: Seritage intends to pay a quarterly dividend in order to comply with REIT requirement to distribute 90 percent of taxable income to shareholders. Seritage Growth REIT S-11: SHLD Shareholders Benefits  Liquidity & Financial Flexibility.  Strategic opportunity for PropCo to diversify tenant mix.  Direct access to capital markets for future real estate acquisitions.  Focused management teams for OpCo and PropCo.  Two distinct investment opportunities for shareholders, operating company and REIT. Sears Holding - Real Estate Strategy

The Sears OpCo benefits from synergies from leasing to third-parties to help "right-size" the SHLD bricks and mortar footprint, and leverage Shop Your Way and omnichannel retail initiatives. Investor Takeaway The biggest risk to Seritage Growth REIT certainly is the potential bankruptcy or insolvency of Sears Holdings; its primary tenant with a junk investment grade bond rating. The Seritage S-11 addresses this SHLD risk factor in a nutshell on page 56, "Our substantial indebtedness, which could adversely affect our financial condition." However, existing SHLD shareholders already have those risks baked into owning the common stock; and the OpCo/PropCo 1:1 spin-out seems to offer some advantages, including a potential dividend. On the other hand, there is no compelling reason for any other investors to be excited about owning shares in the Seritage REIT; given its Sears and Kmart tenant concentration, and the declining same store sales metrics.