Real Estate Dreams Nightmarish for Sears, Penney Investors

NEW YORK (TheStreet) -- Investors, both institutional and individual, own shares of Radio Shack (RSH), J.C. Penney (JCP), Sears Holding (SHLD), and other retailers whose value is partially based on real estate assets.

This "value investing" has occurred even though there is one billion square feet of vacant retail space in the United States, according to Urban Land magazine. While the stock prices of Sears, J.C. Penney, Radio Shack, Bon-Ton Stores (BONT) are other retailers are declining rapidly, the vacancy rate for retail space is decreasing very, very slowly.

Sears presents a particularly egregious example that the retail real estate market market is not valuing as highly as its investors.

In a November 2012 interview with Fortune, Bruce Berkowitz of the Fairholme Fund, stated that, "The value of Sears [which trades near $60] would be over $160 a share if the land on the books was fully valued ... Regardless, you'll see gigantic cash flows from the closing of locations, the pulling-out of the cash from inventory, work in process, and distribution centers. They're not idiots when it comes to real estate. They understand that today's standalone store can be tomorrow's multi-use hotel/residential-retail center."

Sears is now trading for around $37.25 a share after a bull market year for both the stock market and the retail sector.

There are now 119 closed Sears stores for sale or lease, according to the company's website. Sears has closed about 300 stores since 2010. Sears and J.C. Penney recently announced the closing of more than 33 stores. Sears still has about 40% of its closed stores for sale that were shut down since 2010 with more on the way.

Statista predicts that the vacancy rate for retail space will decline from 10.1% in 2014 to 10% by 2015. Should Sears be able to peddle its closed stores at that rate, it will still have well over 100 for sale.


A chain closing a store would seem to be the best indicator that it was not a profitable location for retail operations. That would seem to explain why Sears still has so many for sale. The national vacancy rate was 10.5% in 2013. At its peak during the Great Recession, it was 13%. But Sears has about 40% of its closed buildings from recent years unsold or unleased.

In focusing on how "...today's standalone store can be tomorrow's moonlit-use hotel/residential-retail center," Berkowitz is admitting what the market is stating: that pure retail is no longer the best use for those buildings.

Sears is now looking to convert Sears Auto Center stores into data centers. This strategy failed initially as Sears attempted to create huge data centers from its old stores and warehouses. Now it is going after "smaller footprints in secondary markets."

The shift from huge centers to "smaller footprints" appears to be yet another admission of defeat by Sears management in its real estate activities, evinced by the 119 closed buildings still available.

With 40% unsold, the market is also telling Sears that the value is not there; to be repurposed, its location has to be desirable to make the time, effort and expenses worthwhile.

Sears, J.C. Penney, Bon-Ton Stores, Radio Shack and others are generally suburban mall or strip shopping center tenants. In a speech at the "Invest for Kids Conference" in Chicago last October, legendary real estate investor Sam Zell pointed out that those were not desirable real estate investments due to societal trends and demographic changes. The closing down of stores and then being unable to sell them by Sears and others is certainly testament to that warning from Zell.

Sales growth, earnings-per-share growth, and the stock price have all plunged for Sears, Radio Shack, J.C. Penny, Bon-Ton Stores, and other retailers. It is difficult to see how the real estate is undervalued when there is a glut that is not going away in the United States, which means far fewer buyers than sellers for the future. It is the same situation that has the stock price of so many retailers falling.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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