Sears Holdings Corporation (SHLD): Will Spinning Off a REIT Save J.C. Penney Company, Inc. (JCP)?

Shares of J.C. Penney Company, Inc. (NYSE:JCP) surged Monday, after analysts at ISI Group said that the retailer could create a REIT from 300 of its top stores. ISI Group argued that under this scenario, J.C. Penney shares could be worth as much as $46. Should J.C. Penney Company, Inc. (NYSE:JCP) follow ISI Group’s recommendations? And how likely would such a move be?

J.C. Penney Company Inc. (NYSE:JCP)

Creating REITs can benefit shareholders

Creating a REIT (real estate investment trust) can undoubtedly generate a lot of value for shareholders. Back in November, shares of Penn National Gaming, Inc (NASDAQ:PENN) jumped from about $38 to more than $48 after the company said it would spin off its real estate holdings into a separate, publicly-traded company.

The move wasn’t a one-off event; shares of Penn have continued to rally in the subsequent months.

In a REIT spinoff, a company places some (or all) of its real estate properties into the REIT, which operates as a separate company. The core business then remains within the original shares. In theory, this creates value by allowing the market to asses the company’s real estate holdings separate from its business operations.

Does ISI Group’s plan for J.C. Penney Company, Inc. (NYSE:JCP) make sense?

A different analyst at a different firm, BTIG, upgraded J.C. Penney to “overweight” last Thursday. As part of BTIG’s analysis, J.C. Penney’s real estate holdings gave the firm a minimum value of $11 per share. In the event of a worst-case-scenario liquidation, BTIG reasoned that the real estate holdings would still fetch enough to provide shareholders some value.

But ISI Group’s plan is different from just selling off the company’s real estate assets. Instad, ISI Group recommends that J.C. Penney Company, Inc. (NYSE:JCP) sublease space within its primary stores to generate income from its real estate holdings.

Unfortunately, ISI Group’s theoretical list of possible subletters includes companies like H&M — a company that the new J.C. Penney is attempting to compete against.

Last Friday, J.C. Penney opened its Joe Fresh boutiques in many of its stores. Joe Fresh has been hyped as a key brand that would be instrumental in turning the company around, and a direct competitor to H&M. It simply wouldn’t make sense for J.C. Penney to sublease space within its stores to companies it’s trying to compete against.

Would J.C. Penney Company, Inc. (NYSE:JCP) spin off a REIT?

While it’s possible that J.C. Penney Company, Inc. (NYSE:JCP) could take aggressive actions, a REIT seems unlikely at this point. Management remains as steadfast as ever in its dedication to the turnaround, despite declining same-store sales and a string of disastrous earnings reports.

Before undertaking such an action, the board would likely opt for a change in leadership or even a going-private proposal. Reuters reported in February that the board was considering giving CEO Ron Johnson only six more months to show improvement.

Going private might make more sense for the retailer, as the company could complete its transformation away from the scrutiny of the market.

Investors shouldn’t buy J.C. Penney Company, Inc. (NYSE:JCP) as a real estate play

Above all, investors shouldn’t buy into J.C. Penney Company, Inc. (NYSE:JCP) purely as a play on its real estate. If the company were to take such aggressive actions with its holdings, it would likely only be after further declines in sales (and thus share price).

What’s more, history wouldn’t be on the side of that sort of investment. Sears Holdings Corporation (NASDAQ:SHLD) was seen as a play on real estate when financier Eddie Lampert merged Sears Holdings Corporation (NASDAQ:SHLD) with Kmart. However, that hasn’t worked out; shares of Sears Holdings Corporation (NASDAQ:SHLD) have tumbled more than 60% under Lampert’s stewardship.

As venture capitalist Marc Andreeseen noted on Sears’ stunning decline, “the real estate’s actually not valuable.”

If investors wish to buy shares of J.C. Penney Company, Inc. (NYSE:JCP), they should do so on the grounds that they believe the company’s turnaround strategy will be viable — not on the hopes that the company could generate value by leveraging its real estate holdings.

The article Will Spinning Off a REIT Save J.C. Penney? originally appeared on and is written by Salvatore “Sam” Mattera.

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