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Simon Property Forms a 10-Property JV with Sears Holdings - Analyst Blog

Zacks Equity Research

Retail real estate Investment trust (“REIT”), Simon Property Group Inc. SPG and retailer Sears Holdings Corp. SHLD have formed a 50/50 joint venture (JV) with 10 properties at Simon Malls.

These properties, valued at $228 million, have been contributed by Sears Holdings in exchange for $114 million and 50% interest in the JV; while Simon contributed cash of $114 million for its 50% stake. Furthermore, Simon Property has struck a separate deal to purchase a Sears Holdings property at La Plaza Mall in McAllen, TX.

The move comes as a strategic fit for both Sears Holdings and Simon Property. For Sears Holdings, who’s profitably have taken a beat, the deal offers scope to unlock value from its real estate assets. The company recently revealed a similar deal with General Growth Properties Inc. GGP, which comprised 12 properties valued at $330 million. Sears Holdings also decided to spin off 254 of its stores into a REIT for $2.5 billion.
On the other hand, Simon Property has moved forward after its recent $16.8 billion takeover bid for The Macerich Co. MAC fell through. The company first announced a share buyback authorization of up to $2 billion of its common stock and now, it has entered into this JV that provides opportunity to create value for both its customers and shareholders.

The existing stores would be leased back by the JV to Sears Holdings under a triple-net master lease deal for an expected initial base rent of $13.4 million and a 10-year initial term with two 5-year renewal options. The JV also enjoys the power to re-capture a precise part of the leased space and re-lease it at potentially higher rents to other parties.

While the move aids Sears Holdings’ transformational step toward a asset-light model with lower leverage on physical store locations, Simon Property’s investment in the JV provides it with an opportunity to create more value through re-development.

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