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As Sears Circles The Drain, Its Real Estate Spinoff Flourishes

Eddie Lampert is the chairman of two companies headed in opposite directions.

As chairman and CEO of Sears Holdings, Lampert decided to spin off much of the company's real estate — 235 Sears and Kmart stores — into a new real estate investment trust called Seritage Growth Properties in 2015, paying the original company $2.7B to settle some debt obligations. While Sears has continued to bleed money and shutter stores in hopes of avoiding an almost certain end, Seritage has flourished.

As Sears Circles The Drain, Its Real Estate Spinoff Flourishes

The REIT has used the real estate left over from closed Sears locations to sign new tenants at much higher rents than Sears was paying or to redevelop them into commercial developments such as apartments and offices, the New York Times reports. Meanwhile, Sears continues to close hundreds of stores as it reports hundreds of millions of dollars in losses year after year. The retailer has shed nearly 600 stores since May of last year.

The divergence of the two companies' fortunes is evident in the value of their stocks. As of midday Tuesday, Sears Holdings was trading at $1.26 per share — down significantly from the $8.62/share it was trading at 12 months ago; Seritage shares were up 6.6% to $50.71 Thursday compared to the $47.37 that company traded at a year ago. The latter company has inspired such investor confidence that Warren Buffett's investment vehicle Berkshire Hathaway gave it a $2B loan, which the Times said will help fund its redevelopment efforts.

Among Seritage's planned redevelopment projects are a mixed-use complex with loft apartments in Chicago, a retail village in the Bay Area and a mixed-use apartment complex in Hicksville, Long Island, which the Times reports is in battle with residents over its fit with the downtown.

Lampert is the chairman and a major shareholder of both Sears and Seritage, and investors and executives of the former have accused him of stripping the retail institution for parts in order to enrich himself.

It is a strategy closely associated with hedge funds such as Lampert's ESL Investments, where Treasury Secretary (and Lampert's college roommate at Yale) Steven Mnuchin served as vice chairman after leaving his executive vice president post at Goldman Sachs. Mnuchin also was a shareholder in both Sears Holdings and Seritage before divesting himself as part of his transition to a government post, the Times reports.

“This is a play to wring the last drop of value from Sears until there is nothing left,” former Sears Canada CEO Mark A. Cohen told the Times. “And it’s working.”

Part of those accusations came to light in a lawsuit filed by Sears shareholders against Lampert claiming that the appraisal process used to set a price for the Seritage spinoff did not properly take into account the value of potential redevelopment. The lawsuit was settled last year for $40M, the Times reports. 

Even with all the closures, Sears Holdings reportedly paid Seritage $117M a year in rent in 2017. That number will drop precipitously this year and next, with some wondering if Seritage will progress enough with its redevelopments to fill in the revenue gap. But as its stock price and loan from the world's most famous investor indicate, there is a lot more optimism for the future of Sears real estate than for the stores themselves.