Cole’s real estate sales hit the table after contract talks

People walk near the entrance of a Kohl’s department store in Doral, Florida on June 07, 2022.

Joe Radle | Good pictures

Coles It may not sell its business. But it is now looking to sell some of its real estate Front position.

The retailer announced Friday that it has ended contract negotiations with the owner of The Vitamin Shoppe Ownership group, confirming CNBC’s report from Thursday evening. Instead, Kohl said, it will continue to operate as a separate public company.

Kohl has been pressured for months by activist firms, including Masellam Advisors, to consider selling the company to unlock the value built into Kohl’s real estate.

Macellum argued that Kohlin should sell some of his real estate and lease it out as a way to unlock capital, especially during hard times. However, Kohlin, At least on such a large scale it is opposed to so-called sale-leaseback transactions.

According to Peter Bonbarth, chairman of Covin’s board, the company concluded a small sale-leaseback deal before the Covid pandemic. It recognized a $127 million gain on the sale and leaseback of its San Bernardino e-commerce fulfillment and distribution centers.

On Friday, Kohl’s said publicly in its press release that its board is currently re-evaluating ways the retailer can monetize its real estate. Franchise Group planned to finance part of the acquisition of Kohl’s by selling a portion of Kohl’s real estate to another party and leasing it back. It may have given Kohl’s an idea of ​​what kind of value it could get for its own brick-and-mortar stores and distribution centers.

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“You’ve got an environment where financing has changed so much that it’s really attractive to use real estate as a monetization vehicle,” Bonbarth told CNBC in a phone interview.

“When you combine that with what we think the levels of stocks are, it becomes a very different exercise than it was in the previous financial environment,” he explained. “It’s no secret that Cole has one of the biggest assets on his balance sheet: real estate.”

As of Jan. 29, Kohl’s owned 410 locations, leased 517 locations and operated ground leases in 238 of its stores. All of its own real estate was worth a little more than $8 billion at the time, annual filings show.

Pros and cons

Proponents of sale-leasebacks argue that it is a convenient way for companies to bring funds toward future development as long as there is a buyer for the real estate. But the seller may have to meet lease obligations because they are renting out the property they sold.

Those leases can become more difficult to break and rents may fluctuate in markets. Coles said in its annual filing that a typical store lease has an initial term of 20 to 25 years, with four to eight five-year renewal options.

In 2020, Big Lots reached a deal with private-equity real estate firm Oak Street. raising $725 million Sale and leaseback of four company-owned distribution centers. This provided the big-box retailer with additional cash flow early on The international spread of Covid-19.

Also in 2020, Bed Bath & Beyond Completion A sale-leaseback transaction Along with Oak Street, it sold approximately 2.1 million square feet of commercial real estate and generated $250 million. At the time Bed Bath CEO Mark Tritton said the deal was a move to raise capital to reinvest in the business. Now, however, Bed Bath is facing another cash crunch as its sales slump and Tritton was ousted from his role earlier this week.

Oak Street was planning to provide financing franchise group in a Cole deal, according to a person familiar with the discussions, CNBC previously reported. A representative for Oak Street did not respond to CNBC’s request for comment.

Kohl’s on Friday reaffirmed its plan to do a $500 million accelerated stock buyback later this year. It cut its earnings guidance for the fiscal second quarter, citing a recent softening in consumer demand amid the highest inflation in decades.

“Clearly consumers are under a lot of pressure today,” Kohl’s CEO Michael Gase told CNBC in a phone interview. “We’re not immune to it … but the goal represents value. And it’s more important than ever to amplify that message at times like this.”

He added that Cole’s partnership with Amazon And Sephora is part of the company’s long-term strategy to win new customers.

“The outcome of the board process was absolutely the right response,” he said.

Shares of Kohl’s fell more than 20% on Friday to hit a 52-week low. Franchise Group shares recently fell 9%, hitting a 52-week low.

Macellum did not respond to CNBC’s request for comment.

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