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REITs only slightly scathed by planned Sears, Kmart closures

REITswill escape Sears Holdings Corp.'s planned store closures this summer with onlya few scrapes.

Followingwhat it called a comprehensive evaluation, Sears Holdings said April 21 that itwill accelerate this summer the closings of its unprofitable stores, with 10 Searslocations set to shutter alongside 68 Kmart locations. All of the Sears closuresand most of the Kmart closures will take place in late July, the company said.

"Thedecision to close stores is a difficult but necessary step as we take aggressiveactions to strengthen our company, fund our transformation and restore Sears Holdingsto profitability," Edward Lampert, chairman and CEO of Sears Holdings, saidin a news release. "We're focusing on our best members, our best categoriesand our best stores as we work to accelerate our transformation."

Although14 REITs report Sears or Kmart as a top tenant, they have minimal exposure to thelatest round of planned store closings, according to S&P Global Market Intelligencedata. Brixmor Property Group Inc.has three properties where a Kmart will close, Kimco Realty Corp. and Lexington Realty Trust each own two properties where a Kmartwill close, and CBL & AssociatesProperties Inc. is the only REIT that will see a Sears closure.

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No propertiesowned by Seritage Growth Properties,the single-tenant REIT spun offfrom Sears Holdings in July 2015, are affected.

Withthe liquidation of store inventory and the sale or sublease of real estate, SearsHoldings expects to generate a "meaningful level of cash" and restoreSears to productivity in 2016. But according to Green Street, the pace of storeclosures is too slow to combat Sears' steeply declining revenues.

Lastweek, the research firm said the ailing department store would need to close 300,or 43%, of its existing stores to get back to its pre-recession level of productivity.The firm cited a decline in same-store sales, by gross margin percentage, of 50%since 2006.

In aninterview, Robert Schulz, managing director with Standard & Poor's Ratings Services,described Sears Holdings as a unique case. The company's capital structure and ongoingoperating losses are "unsustainable," he said. But Sears Holdings is alsoasset-rich and able to drum up cash as needed — for a while, at least.

"Mostcompanies at this rating level just don't have the legacy assets that Sears happensto have," Schulz said. "But having said all that, we are at a rating thatimplies vulnerability to default, just because the underlying business needs toget better to avoid eventual restructuring."

Aboutthe planned closures Schulz added: "Typically when these guys closestores they realize more than book value of inventory. And because they either ownthe real estate or the leases are below market, they can typically generate someliquidity from that as well."

S&Pcurrently rates Sears Holdings at CCC+ with a negative outlook.Schulz said Sears ultimately will have to firm up a strategy to effect significantimprovement in its retail operations to improve its credit profile.

"They have a pretty good track record for raising cash fromvarious sources, but that can't go on forever," he said. "They need tomake the retail business profitable."

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S&P Ratings and S&P Global MarketIntelligence are owned by S&P Global Inc.

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Use SNL's Real Estate Top Tenants and Markets Template to view a company's exposure to its top tenants and markets. Other templates are available in SNL's Template Library.