CMBS is new Sears offer as Seritage bids to save chain

JPMorgan issue is part of REIT’s rescue package for ailing US retailer, writes Al Barbarino

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 bought 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 ft, or 90.5%, of the space.

When ratings agency KBRA issued new preliminary ratings on the single-borrower securitisation (see panel), it acknowledged both the deal’s high leverage – an all-in loan-to-value ratio of 117.3%, including $236.2m of existing mezzanine debt – and the troubled history and continued decline of the once dominant big-box retailer.

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Sears’ sales have been declining since 2012

Sears store sales have fallen each quarter since 2012, by 8.6% in Q1 2015 and 8.5% in Q2. The company has been unprofitable since 2012, except in Q2 2015, due solely to the deal with Seritage, which now owns around 16% of the retailer’s outlets.

“Given the declining performance of Sears Holdings, 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.

However, 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% interests in 31 additional stores owned jointly with Simon Property Group, General Growth Properties and The Macerich Company.

The sale gives Sears a cash injection of more than $2bn, which “should provide ample liquidity to meet short-term needs”,  KBRA said. 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.

Bid to transform sears

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

“By separating a portion of Sears Holdings’ real estate into a new, publicly traded company and leasing back the space, we are substantially enhancing its 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 stores in each of the locations owned by Seritage and lease back the properties, as we do at a large number of our locations.”

This could all bode well for the retailer. But excluding the Seritage deal, Sears Holdings’ revenue shrank a reported $1.8bn in Q2 2015, a whopping $600m per month. If such losses continue, the $2.8bn Seritage infusion could be gone in short order. Lampert’s team still has plenty to do to turn round the once-powerful US retailer. n

Cash flow sweeps away downside dangers

As an additional protection, the CMBS deal features a cash flow sweep feature to be triggered by a Sears’ bankruptcy, a payment default or a drop in earnings before interest, taxes depreciation and amortisation below 1.50x any time after October 7, 2016.

The deal includes the $925m A-1 note from JPMorgan Chase Bank, plus a $50m A-2-1 future funding note held by JPMorgan and a similar $50m note held by H/2 SO III Funding I.

The floating-rate loan requires interest-only payments and is structured with a four-year  term and two, one-year extension options. The interest rate is based on one-month Libor plus a 3.99% spread for the trust loan and plus 4.65% for the future funding notes.

KBRA awarded its triple-A rating to the securitisation’s $319m top tranche.

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