Sears Holdings' Proposed REIT Won't Right the Sinking Ship

Sears Holdings (SHLD) has failed to impress investors as a growth stock in recent years, so now it's exploring a new income-producing corporate structure that could yield big dividends if it pans out. Shares of the parent company of Sears and Kmart soared 30 percent last week after it announced that it's considering forming a real estate investment trust -- or REIT, for short -- that would purchase 200 to 300 of Sears Holdings' physical stores, and then lease those locations back to the retailer.

The REIT would be financed by debt, and existing shareholders who would have the right to buy into the rent-collecting entity if they want an income-producing investment. The parent company would receive the proceeds of the sale. The REIT will raise money for Sears Holdings investors, but that money will go to pay rent, cover debt interest payments and pay back suppliers. It's not going to go to turn Sears and Kmart around.

The Harder Side of Sears

The Sears REIT will be a seedless orange. It looks round, vibrant, and tempting from the outside, but after squeezing it a few times, there will be little left but a rind that can't produce new fruit. Sears Holdings will be even worse. Preliminary analysis indicates that it will report its tenth consecutive quarterly loss in a few weeks.

Asset sales and mounting deficits have taken their toll. Common equity at Sears has gone from more than $9 billion at the end of fiscal 2010 to $512 million this summer.

%VIRTUAL-WSSCourseInline-935%Analysts expect a turnaround. They foresee losses widening through fiscal 2019, and it's a fair bet that Sears won't get that far if it keeps bleeding money. With credit rating agencies slashing their designations and CEO Eddie Lampert ignoring the massive investment necessary to update Sears and Kmart stores so they are attractive and relevant to today's shopper, it's hard to see a happy ending here.

Thing were pretty bad three years ago when I wrote about Sears and its inability to regain its former greatness, and this story gets uglier with every passing quarter. The Sears REIT play is doomed because the chain itself doesn't have a viable turnaround strategy that would make relying on rent payments from the parent company a long-term strategy. The real shock here is how a desperate announcement was enough to pop Sears Holdings shares higher. There is only so much pocket change that Lampert will find under the couch cushions before realizing that the sofa itself is the problem.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.