Another premium and regional mall owner, General Growth Properties Inc (NYSE:GGP) owns 123 malls that encompass 128 million gross square footage. With a market cap of $18.3 billion and net debt of nearly $15 billion, General Growth again trades at a significant premium to Sears. The company is valued at roughly $143 per square foot and closer to $250 when considering the large debt position.
Lackluster retail operations
A common mistake made by retail investors is to invest in a stock based solely on the price-to-sales or price-to-earnings multiple without even analyzing the assets of the stock. The common theme with Sears is to focus on the inability of Eddie Lampert to turn around the retail operations of Sears and Kmart. The typical analyst rehashes the concept that Lampert has constantly under invested in sprucing up stores to attracting consumers. That theme, though, is mostly misplaced as Lampert never had a sole focus to turn around the stores; instead he hoped to develop an online presence, which now ranks only behind Amazon.com and Wal-Mart, while limiting the capital improvements on stores since the plan was to sublease and redevelop the assets anyway.
As an example of the weak retail operations, the company reported a large $194 million net loss, or $1.83 per share. While the adjusted EBITDA loss was only $55 million, it compares negatively to the $116 million gain in the prior year quarter. In general, analysts expect large losses to continue for the next few years.
Have you heard of Seritage?
Even as a long-term investor, it was surprising reading the research from Baker Street regarding the subsidiary Seritage Realty Trust. Not that it hasn’t been discussed on numerous occasions that Sears was in the works to sublease space or sell properties, but the vast details regarding the sub-division of anchor pads or the redevelopment of Sears Auto Center outparcels is widely unknown and not marketed by the company.
As a subsidiary of Sears, the company lists the goal as redeveloping over 200 properties in 33 states and covering 18 million square feet. A key investing point for understanding Sears is that the value of the vast real estate holdings is not based on what Sears is currently doing with it, but rather what another retailer could produce out of the same prime space in some of the best malls around the country.
Bottom line
The real estate value proposition appears mostly ignored by the market regardless of compelling investors such as Berkowitz or the intriguing report from Baker Street. On top of that, the valuation propositions compared to General Growth Properties and Simon Property Group Inc (NYSE:SPG) should be difficult to ignore. Of course, the key to the value proposition is turning these valuable assets into income earning properties. The details provided by Seritage suggest that the company is farther along in the process than the market realizes and hence value could be unlocked quicker than expected.
The article Sears Holdings’ Incredible Hidden Value originally appeared on Fool.com is written by Mark Holder.
Mark Holder and Stone Fox Capital have a position in Sears Holdings. The Motley Fool has no position in any of the stocks mentioned.
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