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Sears Holdings and Simon Property form 50/50 joint venture

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Staff writer ▼ | April 13, 2015
Sears Holdings and Simon Property Group created a joint venture as part of Sears Holdings' efforts to unlock the value of its extensive portfolio of real estate holdings.
Sears Holdings
Retail   Sears Holdings will lease back from the JV
Sears Holdings has contributed 10 properties located at Simon malls to the JV, including property leased to outside parties. Sears Holdings will lease back from the JV and will continue to operate existing Sears Holdings stores at the properties contributed to the JV.

Simon has contributed cash to the JV, and the lease arrangements between Sears Holdings and the JV provide the JV with the ability to create additional value through re-developing the contributed properties and re-leasing space at each property to third-party tenants.

"We are pleased to reach this agreement with Simon Property Group, which is an important step in Sears Holdings' continued transformation to a membership company, without the significant asset intensity of its traditional retail business," said Edward S. Lampert, chairman and CEO of Sears Holdings.

David Simon, chairman and CEO of Simon Property Group, stated, "The creation of this joint venture represents an exciting new chapter in our long and successful relationship with Sears Holdings. This is a natural, forward-thinking partnership that will also offer us the ability to potentially redevelop certain locations that will create value for our customers and investors."

The transaction values the properties contributed to the JV at $228 million in total. In exchange for $114 million and a 50% interest in the JV, Sears Holdings has contributed 10 of its properties located at Simon malls to the JV.

Simon contributed cash in the amount of $114 million in exchange for its 50% interest in the JV, which was then distributed to Sears Holdings in accordance with the terms of the agreement between the parties. In addition to the JV transaction, Simon has separately agreed to acquire a Sears Holdings property at the La Plaza Mall in McAllen, Texas.

On April 1, 2015, Seritage Growth Properties, a real estate investment trust formed by Sears Holdings, filed a registration statement on Form S-11 with the Securities and Exchange Commission, providing for a planned distribution of subscription rights to purchase Seritage shares to Sears Holdings stockholders.

Shortly following the consummation of the rights offering, Sears Holdings expects Seritage to purchase its 50% JV interest for a price equal to that paid by Simon for its JV interest. Simon has also agreed to invest about $33 million in Seritage common shares through a private placement, at a purchase price equal to the subscription price of the rights offering (subject to the completion of the rights offering and other conditions).

The JV will lease back existing stores to Sears Holdings under a triple-net master lease agreement (the Master Lease), which has a ten year initial term and two five-year renewal options. Sears Holdings expects to pay initial base rent of $13.4 million under the Master Lease.

Pursuant to the terms of the Master Lease, the JV is provided the ability to re-capture a specified portion of the space leased to Sears Holdings. Following such recapture, the JV will be able to re-lease this space to other parties at potentially higher rents.

The recapture provisions and termination rights within the Master Lease will enable Sears Holdings to continue its transformation strategy into a more asset-light retailer with less dependence on physical store locations, and will allow the JV to create additional value through re-development.

Sears Holdings and Simon will have equal representation on the executive committee that will govern the JV.

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