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J.C. Penney Tries to Squeeze More Cash From Its Home Office

By Adam Levine-Weinberg – Mar 15, 2016 at 9:50AM

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J.C. Penney hopes to rezone more land near its headquarters to increase its potential sale value.

Last month, J.C. Penney (JCPN.Q) announced plans to pursue a sale and partial leaseback for its corporate headquarters in Plano, Texas. The Plano real estate market is very hot right now and J.C. Penney wants to capitalize on this opportunity to monetize a key real estate asset. The proceeds would be used to pay down debt.

J.C. Penney plans to sell its corporate headquarters building to raise cash. Photo: The Motley Fool

Last week, J.C. Penney's real estate efforts took another twist. The company is looking to rezone some of its remaining property in Plano to allow for more development. This should help J.C. Penney bring in even more cash from its headquarters sale.

Plano becomes popular with businesses
Nearly three decades ago, J.C. Penney decided to move its corporate headquarters from New York City to Plano, a suburb of Dallas, in a bid to reduce labor and administrative costs, as well as its tax bill. At that time, the area surrounding J.C. Penney's new corporate campus was still mostly farmland.

By contrast, J.C. Penney's headquarters is now part of a huge swath of corporate offices dotting the so-called "Legacy" corridor. And there is a continuing surge of major corporations relocating to this area.

Two years ago, J.C. Penney contributed 240 acres of vacant land near its headquarters to a new partnership that aimed to create a mixed-use development called Legacy West, featuring offices, retail space, a hotel, and apartments. The developers quickly landed a big catch: Toyota Motor (TM 1.48%) took 100 acres to build a 2 million square foot North American headquarters complex.

This move will consolidate Toyota offices currently located in New York, Kentucky, and California under one roof. Toyota has already moved some employees to Plano, and it will complete the transition during 2017.

Other companies are following Toyota's lead. Liberty Mutual Insurance is building a campus that will house 4,000 employees. FedEx Office -- formerly Kinko's -- recently put the finishing touches on a new headquarters building at Legacy West, replacing other offices in the Dallas area.

It's easy to see the appeal of the Legacy corridor, especially for global companies like Toyota. It's still relatively affordable, the site is well-located at the intersection of two major highways, and it is just a 25 minute drive from Dallas-Fort Worth International Airport: one of the biggest airline hubs in the world, with nonstop flights to five continents.

J.C. Penney tries to extract more value
In light of this building boom in Plano, it's a great time for J.C. Penney to cash out. So while the company originally stated that it planned to sell its 1.8 million square foot headquarters and lease back about two-thirds of the building, J.C. Penney now seems to have bigger aims.

As part of the headquarters sale, J.C. Penney would also like to sell about 40 acres of surrounding land. It recently asked the city of Plano to rezone a 111 acre tract including this property to allow the construction of eight new buildings with office and retail space. This would make it similar in density to the new Legacy West development.

If J.C. Penney gets the necessary approvals, the headquarters site would be vastly more attractive to potential purchasers. Not only would the buyer be able to collect rent from J.C. Penney and any other tenants it could find for the existing building, it would also be able to develop the remaining available land.

J.C. Penney can use every dollar
J.C. Penney executives recently stated that they expect a fall closing date for any potential sale of the Plano headquarters. This, along with internal free cash flow production, should allow J.C. Penney to pay down $400 million-$500 million of debt this year: roughly 10% of its total debt burden.

If J.C. Penney's zoning request is approved, the headquarters sale price could increase, allowing the company to pay down even more debt. By unlocking value from its real estate, the company may be able to get back on a firm financial footing. Meanwhile, J.C. Penney's turnaround will have time to gain steam, driving a return to sustainable profitability.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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