Sears Contemplates Creating a REIT, Reveals Q3 Comparable Sales

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In a Friday filing with the U.S. Securities and Exchange Commission, Sears Holdings Corp. (NASDAQ: SHLD) offered details and insights on several items that should interest shareholders.

Most important, perhaps, the company said it is “actively exploring” the sale of 200 to 300 of its stores in a sale-leaseback to a newly created real-estate investment trust (REIT). Sears would continue to operate the stores sold to the REIT under one or more master leases. Sears went on to say:

In the event such sale-leaseback transaction were to occur, the Company would realize substantial proceeds from such sale, which would further enhance its liquidity. Additionally, if the Company determines to pursue such a sale-leaseback transaction, the Company expects to distribute to its shareholders, on a pro rata basis, rights to purchase shares of common stock or other equity interests of the REIT, funding a portion of the purchase price for the stores from the subscription proceeds of such shares or interests, with the balance from mortgage or other debt financing. … Additionally, if the Company determines to pursue such a sale-leaseback transaction, the Company expects to distribute to its shareholders, on a pro rata basis, rights to purchase shares of common stock or other equity interests of the REIT, funding a portion of the purchase price for the stores from the subscription proceeds of such shares or interests, with the balance from mortgage or other debt financing.

The company also disclosed the sale of a full-line store in Cupertino, Calif., for $102.5 million. Sears received $90 million in cash and a promissory note for $12.5 million payable in one year. The store will continue to operate as a full-line store for up to one year.

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Regarding its already announced $625 million rights offering, the company will not offer subscription rights in the offering to holders of unvested shares. According to the filing, each holder of unvested shares will receive “a cash award in lieu of any and all rights such holder may have had to receive subscription rights to purchase units.” Edward Lampert, the CEO and chairman, will receive “an award of additional shares of [Sears] common stock.”

Next, the company announced that Kmart’s U.S. same-store sales for the third quarter rose 0.5%, while same-store sales fell 0.7% at Sears stores. The aggregate total showed same-store sales down 0.1% in the quarter. For the year to date, aggregated same-store sales are down 0.6%, comprising a drop of 1.2% at Kmart stores and 0.1% at Sears stores.

Sears also said it expects adjusted EBITDA to come in between a loss of $275 million and $325 million for the third quarter, compared with a loss of $310 million in the third quarter a year ago. Here is what the company had to say about this:

This is a meaningful change in the downward trend of our year-over-year domestic Adjusted EBITDA performance relative to the prior six quarters. … We believe this change in trend is a positive development that we currently expect to continue into the fourth quarter.

Sears also said that as of November 1 the store had total cash of approximately $330 million and availability under its credit facility of $234 million, which includes about $168 million from the rights offering at Sears Canada. Not included in the total are any funds raised in the company’s $625 million rights offering or $132 million from the Sears Canada offering. Sears said that assuming both rights offers are fully subscribed, the company’s credit availability would be $1.1 billion, compared with $572 million at the same time a year ago.

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The company said it will announce third-quarter results before the market opens on December 4.

Sears stock was up nearly 20% in premarket trading on Friday to $39.00, after closing Thursday night at $32.67. The stock’s 52-week range is $22.45 to $62.87.