When Sears Holdings Corp (NASDAQ:SHLD) +3.87% struggles, it has a knack for turning from a retail turnaround story into a real-estate play. So once again, the notion has arisen that there’s gold in them thar malls.
A recent report from hedge fund Baker Street Capital Management, which owns a 1.4% stake in Sears, argues its real estate is “conservatively worth over $8.6 billion,” which compares with a current market value for the entire company of $5.9 billion. About $7.3 billion, or $69 a share, of that rests in Sears’s top 350 owned sites and top 50 leases—assets it reckons would be relatively easy to sell in an environment where high-quality mall assets are scarce. Throw in the value of Sears’s brands such as Kenmore, its Lands’ End operations and so on, and the firm says the company is worth $13.9 billion, or $131 a share.
The report has resonated, helping drive Sears shares about 25% higher this month to around $56. But it is also out of whack with other sum-of-the-parts analyses. Wednesday, Credit Suisse analyst Gary Balter struck back, arguing Baker Street wildly overvalued Sears’s real-estate holdings, while putting too high a price on the rest of the company, as well.
Consider: Baker Street says Sears’s top 350 stores are worth $98 a square foot. Contrast that to a May presentation J.C. Penney JCP gave to lenders, where it provided appraisal values for its stores from real-estate firm Cushman & Wakefield. The going-dark value of Penney’s stores in A-grade malls—what the retailer could get for its best locations if it shut down—was $55 a square foot.
A real reason to buy Sears shares would be signs that it was shoring up sales, not its real estate.
“Going dark” is not what the Sears Holdings Corp (NASDAQ:SHLD) valuation at Baker Street was about. “Going dark” implies an empty location most likely due to a Sears Chapter 11 or wholesale forced asset liquidation. Sears is not that case. The Baker St analysis was about Sears Holdings Corp (NASDAQ:SHLD) transitioning good properties for other uses. Think of it more like the 2012 transaction with General Growth Properties Inc (NYSE:GGP) when Sears sold 11 sites at General Growth Properties Inc (NYSE:GGP) malls to GGP for $150sqft.
But lets dig a bit deeper. Here is the applicable slide from the J.C. Penney Company, Inc. (NYSE:JCP) presentation to lenders: