New CMBS backs REIT’s quest to save ailing Sears brand

A new $925m CMBS deal from JP Morgan Chase backs Seritage Growth Properties’ $2.8bn acquisition of 235 properties from ailing retail group Sears Holdings Corporation (SHLD).

A new $925m CMBS deal from JP Morgan Chase backs Seritage Growth Properties’ $2.8bn acquisition of 235 properties from Sears Holdings Corporation (SHLD) as the REIT moves forward with plans to save the ailing retail group. 

Sears and Kmart (which purchased Sears for $11bn in 2005) are the primary tenants in the portfolio tied to JP Morgan Chase Commercial Mortgage Securities Trust 2015-SGP, accounting for 33.5m sq sf, or 90.5%, of the space.

When KBRA issued new preliminary ratings on the single borrower securitization (see chart), the rating agency acknowledged both high leverage on the deal — an all-in 117.3% LTV, including $236.2m of existing mezz debt — as well as the troubled history and continued decline of the big box retailer.

IMG_2062SHLD same store sales have declined each quarter since 2012, down 8.6% in Q1 of 2015 and 8.5% in Q2. The company has been unprofitable since 2012, except in Q2 of 2015 due solely to the deal with Seritage, which now owns approximately 16% of SHLD’s retail stores.

“Given the declining performance of SHLD, it may not be able to pay rent and/or its proportionate share of all insurance, taxes, utilities, and maintenance and repair expenses in connection with the leased properties,” KBRA analysts noted.

But Seritage has big plans to turn the brand around. The recently formed publicly traded REIT paid $2.8bn in June for the 235 stores and Sears’ 50 percent interests in 31 additional stores owned jointly with Simon Property Group, General Growth Properties and The Macerich Company.

The sale gives SHLD a cash infusion of more than $2bn which “should provide ample liquidity to meet short term needs,” according to KBRA. As part of the acquisition, Seritage will also lease the majority of the acquired properties back to Sears Holdings, with the remaining stores being leased to third parties at higher rents.

“We expect the creation of Seritage to enable us to accelerate many of the activities that we have been pursuing over the past several years to transform Sears Holdings into a leading integrated retail membership-focused company,” said Edward Lampert, Sears Holdings’ chairman and CEO, after the sale closed.  

(Source: KBRA)
(Source: KBRA)

“By separating a portion of Sears Holdings’ real estate portfolio into a new, publicly traded company, and leasing back the space, we are substantially enhancing Sears Holdings’ financial flexibility and significantly transforming our capital structure toward one that is more flexible, long-term oriented and less dependent on inventory and receivables.

“We expect to continue to operate most of our retail stores in each of the locations owned by Seritage and lease back the properties, just as we do at a large number of our locations.”

As an additional protection, the CMBS deal features a cash flow sweep feature to be triggered by a SHLD’s bankruptcy, a payment default or a drop in EBITDAR below 1.50x any time after October 7, 2016.

The deal includes the $925m A-1 note from JPMorgan Chase Bank in addition to a $50m A-2-1 future funding note held by JPMorgan and a $50m A-2-2 future funding note held by H/2 SO III Funding I. The floating rate loan will require interest-only payments and is structured with a four-year initial term and two, one-year extension options. The interest rate is based on one month LIBOR plus a spread of 3.99% for the trust loan and LIBOR plus 4.65% for the future funding notes.

Seritage began trading on the New York Stock Exchange under the symbol “SRG” on July 6. Sears Holdings will continue to be listed on the Nasdaq Global Select Market under the symbol “SHLD.”

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