Bankrupted J.C.Penney's plans to spin its properties

May 16, 2020CNBC  |  Original Article


A piece of J.C.Penney's proposal to emerge from bankruptcy includes spinning its real estate into a publicly-traded real estate investment trust.

As part of a plan filed with the bankruptcy court, Penney would reorganize into a new retailer ("JCP"), along with a REIT that would collect rent checks from the retail business. Court documents say as much as a 35% stake in the newly created REIT could be sold to a third-party investor to raise cash, or to provide additional funding for the REIT.

Weighed down by a heavy debt load of more than $4 billion and hit hard by the coronavirus pandemic, Penney filed for Chapter 11 bankruptcy protection Friday evening.  Some are now questions if the department store chain, which has been around for more than a century, should still operate.  It has been stuck in a sales slump for years.  The department store industry as a whole has also been on the demise, with people shifting their spending away from the mall. When Penney filed, it still operated roughly 850 locations at malls across the country.

This would not be the first time a struggling department store operator has relied on its real estate value to come up with liquidity.  Sears in 2015 spun off roughly 250 properties to form the REIT Seritage Growth Properties.

"As soon as reasonably practicable," Penney will list common stock of the new JCP and the REIT on a national securities exchange, court documents say.

Penney is also planning to do sale-leaseback deal for its distribution centers, according to the documents, which would help it raise more cash.  Such a transaction entrails selling real estate and leasing it back.  Many retailers, including Macy's, Big Lots, and Bed Bath & Beyond, have deployed this strategy in the past to come up with liquidity in a pinch.

"JC Penney now finds itself facing another monumental challenge to its business: emerging from the disruption caused by the novel Coronavirus pandemic," CFO Bill Wafford said in his court declaration.

Because of the Covid-19 crisis, Penney's year-over-year net sales tanked by roughly 88%, and bricks-and-mortar sales dropped to almost $0, Wafford said.

Penney's unencumbered real estate is valued at $1.4 billion when the lights are on, and $704 million when they're shut, Kirkland & Ellis attorney Joshua Sussberg said Saturday during a virtual court hearing.

As of the bankruptcy filing, seven Penney stores were operating curbside pickup and 41 were fully open for business again, Sussberg said.  All of Penney's shops had been temporarily shut to try to help curb the spread of Covid-19 virus since March 18.

Penney now has until July 15 to strike a business plan and hit certain milestones to receive the full bankruptcy financing package it has struck, or else is must pursue a sale.