Baker Street Capital published a letter to Sears, its a very interesting one check it out below.
Why is Sears Our Highest Conviction Idea?
Contrary to consensus, Baker Street believes Sears is an extremely asymmetric, timely, and high margin of safety investment
- Baker Street’s property-by-property real estate appraisal found that at least $7.3bn of value lies at the top 350 owned and 50 leased locations (p. 4)
- Real estate value is starting to be actively unlocked (p. 9)
- According to REITs and mall owners, demand and pricing for space in high quality malls where Sears owns space is at an all-time high (p. 25)
- At ~$44/share Sears sells for ~1/3rd of break-up value, offering substantial upside even in scenarios where retail operations are wound down (p. 33)
- Break-up value is relevant because Eddie Lampert, Chairman and CEO, has intimated that he will look to realize Sears’ sum-of-the-parts value if profits and returns on capital don’t improve
- Lampert personally spent ~$250m to increase his ownership by 50% over the last 2 years and ~$100m in the last 12 months near current prices (p. 39)
- With an effective float of only 6.9 million shares and 15.7 million shares sold short, a short squeeze could occur from positive developments (p. 41)
- Actively exploring large potential deals & capital structure changes (p. 45)
Baker Street Real Estate Appraisal
- Baker Street’s property-by-property real estate appraisal found that at least $7.3bn of value lies at the top 350 owned and 50 leased locations
- See Baker Street’s separate “The Softer Hard Asset Side of Sears” real estate valuation presentation for details
Baker Street Proprietary Real Estate Analysis
Baker Street commissioned a property-by-property real estate appraisal to understand the value and concentration of Sears and Kmart assets
Baker Street hired real estate professionals to perform a detailed appraisal of Sears and Kmart locations on a property-by-property basis
Baker Street believes this is the first in-depth, post-recession independent appraisal of Sears Holdings’ real estate value
Key Takeaways
Total value of the top 350 owned and top 50 leased locations is at least $7.3bn, with the top 200 owned locations alone worth more than $4.4bn
“80/20 phenomenon” – The vast majority (~84%) of real estate value lies in just ~20% of Sears and Kmart store locations
Major implication: Sears has ready access to real estate value in excess of the market cap without requiring a mass liquidation
To be conservative, Baker Street did not ascribe value to redevelopment opportunities in the real estate portfolio, which we believe to be significant
BakerStreet SHLD by ValueWalk.com
Via: bakerstreetcapital.com
