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Bankrupt JC Penney plans to convert real estate into a new real estate company

An empty parking lot is shown in a closed JC Penney store in Roseville, Michigan, on May 8, 2020.

Paul Sancya | AP

Part of the J.C. Penney’s emergence from bankruptcy involves converting his property into a publicly traded property investment fund.

As part of a plan filed with the bankruptcy court, Penney would restructure into a new retailer (“JCP”) along with a REIT that would collect rent checks from a retail store. Court documents state that up to 35% of the newly created REIT could be sold to a third party investor to raise money or provide additional funds for the REIT.

Penney was burdened with a high debt burden of more than $ 4 billion and was badly hit by the coronavirus pandemic. On Friday evening, he applied for Chapter 1

1 bankruptcy protection. Some are now wondering whether the department store chain, which has been around for more than a century, should still work. There has been a decline in sales for years. The department store industry as a whole was also in decline, and people were shifting their expenses away from the mall. When Penney submitted, it was still operating around 850 locations in shopping centers across the country.

This would not be the first time that a weakening department store operator relies on its property value to raise liquidity. Sears spun off around 250 properties in 2015 to form REIT Seritage Growth Properties.

“As soon as reasonably practicable,” Penney will list the common shares of the new JCP and REIT on a national stock exchange.

Penney is also planning sale-leaseback deals for its distribution centers to collect more money, according to the documents. In such a transaction, real estate is sold and leased back. Many retailers, including Macy’s, Big Lots, and Bed Bath & Beyond, have used this strategy in the past to raise liquidity when needed.

“JC Penney is now facing another monumental business challenge: it emerged from the disruption caused by the novel corona virus pandemic,” said CFO Bill Wafford in his court statement.

Due to the Covid-19 crisis, Penney’s net sales fell about 88% year-on-year and over-the-counter sales fell to almost $ 0, Wafford said.

Penney’s unencumbered properties are worth $ 1.4 billion when the lights are on and $ 704 million when they are closed, Kirkland & Ellis attorney Joshua Sussberg said Saturday during a virtual court hearing .

At the time of the bankruptcy filing, seven roadside Penney stores were operating and 41 were fully open again, Sussberg said. All Penney stores had been temporarily closed since March 18 to curb the spread of the Covid-19 virus.

Penney now has until July 15 to set up a business plan and meet certain milestones to receive the full bankruptcy finance package he has completed, or to pursue a sale.

CNBCs Lauren Hirsch contributed to this reporting.

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