Hawaii Store Is the Prize in Sears Deal

The Ala Moana Center in Honolulu

For mall owner General Growth Properties Inc., the purchase of 11 store sites from Sears Holdings Corp. is mostly about one property: the Sears at one of General Growth’s cash-cow malls, Ala Moana Center in Honolulu.

General Growth disclosed Thursday that it’s paying Sears $270 million for the 11 department-store sites. Most of those are at average malls across the U.S., including Market Place Shopping Center in Champaign, Ill., and Quail Springs Mall in Oklahoma City, Okla.

The exception is the Sears at Ala Moana, one of the most lucrative malls in the U.S. Of the deal’s price tag, the portion attributable to the Sears at Ala Moana ranges from $200 million to $250 million, according to a source familiar with the deal.

General Growth intends to eventually raze the store and build in its place several smaller shops, which deliver more rent in aggregate than department stores. All told, General Growth wants to add another 270,000 square feet of small-shop space to the 2.4 million-square-foot mall, potentially adding $54 million of annual income, according to UBS Securities LLC.

The deal likely is a harbinger of more such purchases by mall owners who want to gain control of Sears sites at their malls so they can redevelop them. “There’s little doubt that most mall owners have had ongoing conversations with Sears, trying to understand what they can take back in real estate,” said Cedrik Lachance, an analyst with Green Street Advisors.

This issue of replacing Sears has come to a head in recent months after Sears announced in December that it will close 120 stores. It operates 842 in U.S. malls. The venerable retailer has struggled in recent years with declining sales and hefty losses, leaving mall owners anxious about how to obtain and redevelop Sears’ stores if it decides to vacate them.

Expansion in the department-store industry has ground to a near halt, meaning there are few large tenants ready and able to move into such sites. Thus, many mall owners now opt to raze vacant anchor stores and replace them with smaller stores, restaurants or theaters.

Despite the steep costs of making such changes, some mall owners would rather buy and control such store sites than letting them languish with Sears or its creditors.

“It’s interesting to see movement, because things have been stagnant for some time,” said Michael Glimcher, Chairman and Chief Executive of Glimcher Realty Trust, which owns 24 U.S. malls. “It’s interesting and exciting to see them capitalizing on an opportunity (to sell real estate). It’s more encouraging than anything else.”

Glimcher counts 20 Sears department stores in its portfolio, of which roughly half are owned by Sears. “They still do a lot of volume in our malls,” Mr. Glimcher said of Sears. “We have stores under $10 million (in sales) and stores over $35 million in our portfolio.”

Of Sears’ mall stores, the retailer owns 514 and leases 328, according to Credit Suisse Securities LLC. General Growth, based in Chicago, owns 136 malls.

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