Sears Holdings (SHLD) “Surprising” Asset Quality?

Sears Holdings (SHLD) “Surprising” Asset Quality?

This is amazing. Why? Lets not forget Credit Suisse has been the most vocal Sears ( SHLD) bears the past few years. Credit Suisse’s Balter has said the company is worth only $20/share (~$2.1B) and the the real estate case for the company is bunk. That $20 includes the value of all the real estate, Kenmore, Craftsmen and diehard brands and the home service division. Even if we give the retail operations a zero, its hard to imagine the rest of those only worth $2B.

Now, if one stands back and looks at it, the company over the past two years between the REIT spin and Sears Canada transactions will have raised >$3B from its real estate and will still have over 700 stores left to its name.

I guess it should be come as little wonder why Credit Suisse folks are “surprised” at the asset quality? This obviously begs the question, when CS slapped a $20 price target on it and mocked the real estate value argument, what they hell were they looking at? It isn’t like Seritage was slapped together in the last few months. It has been around for a couple years and Sears has been leasing properties just as long. Even rudimentary work into what Sertitage had would have turned up more value than CS thought (Seritage’s former website listed all available properties with demographics).

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From Barron’s

Credit Suisse analysts Ian Weissman and team dig into Seritage (SRG), the real-estate investment trust being spun off from Sears (SHLD):

“Surprisingly so, the demographic profile of the SGP portfolio is slightly better than the mall REIT average, with 10-mile density and incomes of 694k and $77k (GLA weighted), respectively which compares to the REIT mall average of 680k people and $77k income. Generally speaking, this will come as a surprise to most investors who have a view that Sears retail stores are predominately located in secondary markets—that may be true, but the owned assets (SGP) are clearly of higher quality. Investors should note, however, that there is a wide range of market exposure with 25% of SHC’s assets are located in densely populated markets with total population in excess of 800k people, while more than a third of the sites are located in tertiary markets with 10-mile population density of less than 250k people.

Key takeaways from our recent sit-down with Seritage CEO, Ben Schall: Key takeaways: 1) seeing significant demand from a wide range of retailers interested in the Sears space as retailers are not meeting store growth targets because lack of available boxes; 2) believes the appropriate cap rate on the SGP box should come at a premium to the attached mall (lower cap rate); and 3) believes there is significant upside opportunity in densifying the Sears site, and building out additional GLA and outparcels.”

Note: I have no idea if Balter is part of Weissman’s team or not (or if he has been relieved of his Sears Holdings coverage), but this is some pretty uncomfortable stuff for people who might be relying on their research…

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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