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Joint Venture between Sears and Simon Property to Form 10 Mall Properties

04/30/2015

According to Bloomberg and others, a deal to form 10 mall properties is in the works between Sears and Simon Property. This is the second 50/50 joint venture of its kind, which is part of an ongoing strategy to unlock the value of commercial real estate.

In trying to unlock the value of its large real estate holdings portfolio, Sears Holdings Corporation along with Simon Property Group, Inc. has established a joint venture for 10 leases. To the joint venture, 10 properties were contributed by Sears at various Simon malls. Properties that are currently leased to outside parties, which will be leased back by Sears, are part of the joint venture.

For Simon’s part, cash was brought to the table. Under the least arrangements, the joint venture will have the opportunity to create additional value by releasing some of the space at all 10 properties to other third-party tenants but also through the redevelopment of properties that Sears’ contributed.

Growing Joint Venture Opportunities

Earlier this month, an arrangement similar was created with General Growth Properties, Inc. for 12 mall properties, making this the second deal for Sears in a very short period of time.

Regarding the joint venture between Sears and Simon, existing Simon Property located stores will be leased back to the joint venture to Sears under a triple-net master agreement. This includes one 10-year initial term, as well as two, 5-year renewal options. The initial base rent that Sears is expected to pay for this joint venture is $13.4 million.

In total, the contributed properties to the joint venture are valued at $228 million. In exchange for 50 percent interest in the joint venture, Simon spent $114 million. These funds will be distributed to Sears Holding in accordance with the agreement terms. Separately, Simon agreed to acquire property at the McAllen Texas La Plaza Mall.

As reported by Forbes, Edward S. Lampert, chairman and CEO of Sears Holdings Corporation said the company is excited to have reached an agreement with the Simon Property Group. Lampert expressed that this joint venture is a critical step for Sears as the company continues to transform to a membership organization but without a lot of asset intensity of its more conventional retail business.

Lampert added that the deal with Simon coupled with other initiatives to boost shareholder value through a vast portfolio of commercial real estate, enhances the company’s financial flexibility. As such, Sears will be able to invest in even longer-term strategies to include integrated retail and membership platforms.

Agreement Details

An initial public stock offering was proposed by Sears on April 1 for Seritage Growth Properties, an investment trust formed whereby it would own as many as 254 of the estimated 1,700 Sears and Kmart stores. Sears anticipates that Seritage will buy its 50 percent joint venture for close to the same price paid by Simon for the second joint venture.

In addition, Simon has agreed to invest nearly $33 million through a private placement for Seritage common shares. Both of these joint ventures will create an opportunity for a specified portion of space leased to Sears to be recaptured. With this done, space will be released by the joint venture to other parties, possible at higher rents.

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