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Sears liquidation to cost landlord nearly half its rent income

Seritage says it's been steadily trimming its exposure to Sears, replacing shuttered stores with other tenants

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A woman shopping for clearance items in front of a Sears store in California. The company's CFO on Monday pleaded for vendors, employees and other stakeholders to help it reorganise in bankruptcy.

New York

A SEARS liquidation would cost its real estate spinoff 47 per cent of its annual rent income, or about US$84 million in cash flow, according to regulatory filings.

Seritage Growth Properties, a real estate investment trust (Reit), was created in 2015 by Sears' chief executive officer Eddie Lampert to be the property owner and landlord for select locations of Sears and its sister chain, Kmart.

As the Sears bankruptcy case kicks off in New York, this week, the retailer hasn't reached an agreement with lenders over how many stores - if any - will stay open past the holiday season.

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The company's chief financial officer, in a Monday court filing, pleaded for vendors, employees and other stakeholders to help it reorganise in bankruptcy. About 68,000 jobs are on the line.

Rent from 82 Sears properties brings in US$49 million for Seritage, according to a filing.

Other property-related expenses paid by Sears would push the loss of cash flow to US$84 million, the real estate investment trust said. Other tenants pay a total of US$55 million.

Seritage said in a statement on Monday that it's been steadily trimming its exposure to Sears. It's been replacing shuttered Sears stores with other retail and, in some cases, residences.

The Reit has a wider base of tenants in the pipeline - it expects an additional US$72 million from leases beginning in the next 24 months - and historically it's been able to increase the rent on spaces Sears leaves behind for new tenants.

But signed lease income includes commitments from future tenants, and of current rent revenue, Sears is a more significant portion, according the Reit's filing.

Sears exposure could create short-term pain for Seritage if too many stores shutter before its new tenants start paying.

"It's such a large chunk," said Bloomberg Intelligence analyst Lindsay Dutch. "It's still over 40 per cent of their rent."

Mr Lampert's hedge fund, ESL Investments, is pursuing a deal to provide more bankruptcy financing, while also discussing buying a portion of the company's outlets.

Of the 142 stores Sears intends to shut, 42 sit on property owned by Seritage.

Just five Kmart stores earmarked for closing are part of Seritage's portfolio.

Seritage shares are down 5.4 per cent since the beginning of the year.

Three years ago, Mr Lampert raised US$2.5 billion for the chain by selling Seritage about 250 of Sears's best properties for the retailer to lease back.

Though the move attracted its share of controversy, it allowed Sears to turn a short-term profit even as revenue deteriorated. Seritage has gone on to be the one profitable part of the Sears constellation.

The Reit sits on a US$1 billion liquidity cushion after Warren Buffett's Berkshire Hathaway loaned it US$2 billion earlier this year. Mr Buffett personally owns a stake of more than 5 per cent in Seritage, according to regulatory filings.

"Even if you imagine a really horrible scenario, it's not a big issue for Berkshire," said Richard Cook, a longtime Berkshire shareholder and fund manager in Birmingham, Alabama, who oversees about US$360 million. BLOOMBERG