Exclusive Update

J.C. Penney (NYSE: JCP) shares were making noise again on March 18, but not for the usual reason. ISI Group analyst Omar Saad suggested in a research note that Penney shares could be worth $46 if the company subletted or rented out retail space in its 300 top locations. Shares spiked as much as 11% in intraday trading as the market seemed to agree with Saad's analysis. By comparison, Sears, another struggling mall-anchor retailer, saw an extended gain in its stock after it began selling off real estate a little more than a year ago, so this is not a novel idea for a declining retailer. Let's take a look at some of the facts, and see if there's hidden value in Penney's real estate.

As of January 2012, J.C. Penney operated 1,102 stores, 426 of which it owned. It controlled 111.2 million square footage of space at its retail stores, and in 2011, the company paid a total rent expense on all properties of $323 million, $257 million of which was for store-level property, or about $4 per square foot. Real estate is traditionally valued at 10 times its rent, so extrapolating the above figures would give J.C. Penney's owned store-level retail a value of $1.7 billion. On its balance sheet, property and equipment was listed at nearly $5.2 billion.

Nationwide, the average mall real estate rent goes for about $40 a square foot, so J.C. Penney's real estate could potentially be worth much more than its occupancy cost would indicate. In his analysis, Saad claimed that neighboring real estate at J.C. Penney's top locations goes for around $70 a square foot, a vast difference from the $4 per square foot the company pays on average, prompting his remarks that the company could turn a profit of $1.2 billion leasing and subleasing its top locations.

Is this a deal or what?

Perhaps a comparison with its peers will better tell if J.C. Penney is sitting on a real estate gold mine. Macy's operates 842 stores, 464 of which it owns, and oversees 151.9 million square feet of retail space, as of January 2012. With total rent of $261 million, Macy's pays between $4 and $5 per square foot, similar to J.C. Penney. Macy's carries over $8 billion in property on its balance sheet, and a market cap more than four times Penney's. While Penney's shares have tanked over the last year, Macy's have only been getting stronger.

Sears had 2,548 stores under its domain as of January 2013, 750 of which it owned outright, and 1,520 of which it leased. The other 278 were franchised. Total rent for its stores last year was $841 million , and with more than 300 million square feet of retail real estate under its belt, Sears was indeed paying a price similar to what J.C. Penney and Macy's pay, between $4 and $5 per square foot. On its balance sheet, Sears' buildings were valued at a little more than $6 billion.

Based on a look at its peers, J.C. Penney's real estate holdings do not seem to be a particularly strong opportunity, but just the industry norm. Real estate, after all, is necessary for brick-and-mortar retail, and these department stores would tend to pay lower occupancy costs than stores with smaller footprints.

Foolish bottom line

J.C. Penney did not comment on Saad's suggestion, but it's clear that the company is not going to become a full REIT anytime soon, especially if it means ditching the most valuable real estate it has when it's only beginning its brand transformation. CFO Ken Hannah indicated that Penney could be willing to leverage some real estate in order to fund operations. "We're sitting on 300 acres of the most sought-after land in all of Dallas," he said, referring to the company headquarters. "We're not looking to sell our core assets to survive. We're looking to take our non-core assets and use them as a source of funding."

Still, it seems odd for Hannah to consider selling part of the headquarters.

The retailer may need that funding soon. As of its last earnings report, the company was down to $930 million in cash with nearly $3 billion in debt, a liability that negates much of the value of its property holdings.

J.C. Penney's real estate holdings may provide some reassurance to investors and could act as a floor on the stock price, but as we saw with the comparison to Macy's and Sears, this is neither unique nor a competitive advantage in the department-store industry. In retail, property is just a necessity for doing business, and brand and operational strength ultimately make the difference.

Even if Penney's management wanted to implement Saad's plan, it's unclear how it would carry it out. The mall anchor space would have to be sliced up in order to be converted into a space that smaller retailers would use, and landlords may be unwilling to go along with that plan, since it would be of no direct benefit to them.

Operations, not hidden asset value, will determine J.C. Penney's value in the end. The share price will not rebound until the chain stops bleeding cash. Keep your eye on that metric rather than any real estate finagling in the coming months.

Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.