Sears Joint Venture Aims to Enhance Financial Flexibility

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searsSears Holdings Corporation and The Macerich Company announced a joint venture as part of Sears’ continued efforts to enhance its financial flexibility and generate value from its real estate portfolio.

Sears Holdings contributed nine properties where Sears currently operates stores located at Macerich malls to the joint venture (“JV”), including property with space leased to third parties. Sears Holdings will lease back from the JV and continue to operate existing Sears Holdings stores at the properties contributed to the JV.  Macerich contributed $150 million in cash to the JV, which has been distributed to Sears Holdings.

The lease arrangements will allow the JV to create additional value through recapturing certain space leased to Sears Holdings in the contributed properties and re-leasing that space to third-party tenants.

“Since the filing of the registration statement for Seritage Growth Properties a few weeks ago, we have entered into JV agreements with the leading mall operators in the U.S., demonstrating the value of Sears Holdings’ real estate portfolio,” said Edward S. Lampert, Chairman and CEO of Sears Holdings. “We are pleased to be in a position to unlock substantial value for Sears Holdings shareholders and further facilitate the company’s transformation.  Through these transactions, we have additional capital to invest in our membership and integrated retail platforms.  We will continue to operate these nine stores and there will be minimal impact on their day-to-day operations or the overall shopping experience for our members.”

Transaction Structure: Total purchase price for the 9 properties is $300 million. In exchange for $150 million and a 50% JV interest, Sears Holdings contributed to the JV the 9 properties located at Macerich malls where Sears Holdings currently operates stores. Macerich contributed $150 million in cash for its 50% JV interest, which has been distributed to Sears Holdings in accordance with the terms of the agreements between the parties.

Other Terms: The JV will lease back existing stores to Sears Holdings under a triple-net master lease agreement (the “Master Lease”), with a ten year initial term and two five-year renewal options. Sears Holdings’ initial base rent under the Master Lease will be approximately $14.8 million. Under the Master Lease, the JV has the ability to recapture 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 into a more asset-light retailer with less dependence on physical store locations, and will allow the JV to create additional value through the re-configuration and re-development of its properties. Sears Holdings and Macerich will have equal representation on the executive committee that will govern the JV.