Approximately 120 J.C. Penney retail locations change hands for roughly $950 million to a private equity group
In a significant move during its Chapter 11 restructuring, American department store chain J.C. Penney has sold 119 of its stores to private equity firm Onyx Partners for $947 million. The sale, announced by Copper Property CTL Pass Through Trust, was established as part of J.C. Penney's 2020 bankruptcy plan.
The advantages of this deal primarily centre around operational flexibility, capital redeployment, and asset repurposing opportunities. By opting for private equity ownership, J.C. Penney has shifted from long-term mall ownership to flexible leases, enabling cost savings and liquidity unlocking, crucial during retail sector disruptions.
Private equity investors, such as Onyx Partners, tend to focus on adaptive reuse of underperforming retail assets. This could transform these properties into logistics hubs, mixed-use developments, or experiential spaces, which is generally harder to execute within the REIT structure that emphasises stable mall occupancy and traditional retail formats.
Moreover, private equity-backed transactions reflect market demand for operational flexibility and higher cap rates. In this case, the deal offers a cap rate of 10.37%, prioritising asset repositioning over reliance on conventional retail foot traffic. This contrasts with REITs, such as Simon Property and Brookfield, which capitalise on relatively stable mall occupancy but have less flexibility to repurpose or redevelop properties aggressively.
Finger, a former CFO of a public REIT and a board member of another REIT for 11 years, stated that the current deal is superior to rolling J.C. Penney properties into a REIT. He noted that REITs with extraordinary tenant diversification would not be comparable to J.C. Penney, given its department store status and single tenant.
The stores being sold are under leases that can extend up to 45 years. Neither Simon Property Group nor Brookfield, current landlords of J.C. Penney, were parties to the sale. The sale to Onyx is expected to close by September 8.
J.C. Penney's financial performance in 2020 has been challenging. The company swung to a $177 million loss compared to a net income of $30 million in 2019, which had an extra week. Consolidated adjusted EBITDA for J.C. Penney in 2020 fell more than 45% to $172 million. The total net sales of J.C. Penney in 2020, excluding credit card sales, fell by 8.6% to $6.3 billion.
Copper had previously sold over 40 stores to various buyers. The average price per property in the sale is $8 million, at least $2 million lower than previous sales facilitated by Copper. The sale deadline was originally set for January, but could be extended if a majority of the certificate holders approve.
In summary, the private equity ownership offers flexible leasing and redevelopment, allowing repurposing of retail space in response to e-commerce and demographic shifts. It provides immediate liquidity and cost-saving benefits crucial during Chapter 11 restructuring. The deal enables higher-risk, potentially higher-return strategies such as converting malls into logistics or mixed-use properties. In contrast, REITs focus on stable cash flow from traditional retail tenants but may have less agility in asset transformation. Thus, selling properties to private equity gives J.C. Penney greater adaptability in managing its real estate footprint amid changing retail dynamics than forming a REIT would.
- The shift towards private equity ownership for J.C. Penney's real-estate assets provides a platform for implementing higher-risk, potentially higher-return strategies like converting malls into logistics or mixed-use properties, a move that is generally harder to execute within REIT structure.
- By selling its stores to private equity firms like Onyx Partners, J.C. Penney is able to secureflexible leases, which offer cost savings and liquidity unlocking, particularly crucial during retail sector disruptions.
- In the context of changing retail dynamics, selling properties to private equity offers J.C. Penney greater adaptability in managing its real-estate footprint, compared to forming a REIT, as private equity ownership provides more operational flexibility for asset repositioning and repurposing.
