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JC Penney Opts for Sale-Leaseback of Home Office to Reduce Debt

Sharon Bailey

Planning for the Future: JC Penney Seeks Debt Reduction

Sale-leaseback of home office

On February 5, 2016, JC Penney (JCP) announced that it’s exploring the sale and partial leaseback of its three-story home office building in Plano, Texas. The company’s decision was driven by favorable real estate conditions in the region and excess space in the building. JC Penney’s stock price appreciated by 0.5% on February 5. The S&P 500 Index fell by 1.8%.

Proposed transaction to reduce expenses

Aside from bringing down its debt, JC Penney’s proposed sale-leaseback of its home office campus is also expected to reduce expenses. The company expects the cost of leasing space within the building to be offset by a reduction in maintenance costs, property taxes, and interest expense. The interest expense will come down as the company plans to pay down debt with the transaction proceeds. JC Penney selected CBRE Capital Markets to market the 1.8 million-square-foot home office campus located in Legacy Business Park in Plano, Texas.

Aside from JC Penney, Macy’s has also been taking initiatives to enhance the value of its real estate. On January 29, 2016, Macy’s completed its transaction with Tishman Speyer for the redevelopment of its Brooklyn, New York, store on Fulton Street. Macy’s has been under pressure from activist investor Starboard Value to monetize its real estate.

JC Penney’s high debt level

JC Penney’s debt level increased significantly over the past few years. The company tried to recover from the severe losses that resulted from former CEO Ron Johnson’s failed attempt to reinvent the department store chain. JC Penney accounts for 0.04% of the iShares Russell Mid-Cap ETF (IWR) and 0.1% of the iShares Russell Mid-Cap Value ETF (IWS).

At the end of 3Q15 ending October 31, 2015, JC Penney’s total debt stood at $5.2 billion. As at the end of 3Q15, JC Penney’s DE (debt-to-equity) ratio was 3.4x. It was higher than Macy’s (M), Nordstrom (JWN), and Kohl’s (KSS). Their DE ratios were 2.0x, 1.9x, and 0.9x, respectively, as of 3Q15.

Aside from debt reduction, JC Penney is also taking several other initiatives to improve its bottom line. We’ll discuss this in the next part of this series.

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