Cole real estate sale on table after deal talks collapse

People walk near the entrance to a Cole store on June 07, 2022 in Doral, Florida.

Joe Riddell | Getty Images

kohl She might not sell her business after all. But she is now looking to sell some of her real estate, and reverse course preposition.

The retailer announced on Friday that it has concluded deal talks with owner Vitamin Shoppe franchise groupConfirming what was reported by CNBC on Thursday evening. Instead, Cole said, it will continue to operate as a stand-alone public company.

Kohl’s has been pressured for months by activist firms including Macellum Advisors to consider selling the company, largely to unlock the restricted value in Kohl’s properties.

Macellum argued that Kohl’s should sell and re-let some of its properties as a way to unlock capital, especially in difficult times. Cole, however, Resists so-called lease-back transactions, at least on such a large scale.

The company completed a small sale and leaseback deal earlier in the Covid pandemic, according to Peter Bonbarth, Cole’s chairman. It generated $127 million in gains through the sale, leasing, implementation, and distribution of San Bernardino e-commerce centers.

On Friday, though, Kohl’s explicitly indicated in its press release that its board of directors is currently reassessing the ways in which the retailer can monetize its properties. The Franchise Group was planning to finance part of the acquisition of Kohl by selling and then leasing a portion of Kohl’s real estate to another party. This likely gave Kohl an idea of what kind of value it could bring to its stores and owned distribution centers.

“You now have an environment where finance has changed so much that it may actually be more attractive to use real estate as a means of monetization,” Bonbarth told CNBC in a phone interview.

“When you combine that with what we think of as inventory levels, it becomes a much different exercise than it was in the previous financing environment,” he explained. “It’s no secret that Kohl’s has a very large balance sheet asset: real estate.”

As of January. 29, Kohl owns 410 locations, leased another 517 and operated land leases on 238 of its stores. All of the properties she owned were valued at just over $8 billion at the time, which the annual filing shows.

Pros and Cons

Proponents of sale and leaseback deals argue that it is a convenient way for companies to funnel money to put into future growth, as long as there is a buyer for the property. But it also leaves the seller having to meet the rental obligations because he will be renting out the property he just sold.

Breaking these rents may become more difficult and rents can fluctuate across markets. Kohl’s 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 the privately held real estate company Oak Street to Raised $725 Million From the sale and leaseback of four company-owned distribution centers. It gave the big box retailer extra cash during the near start covid-19 pandemic.

Also in 2020, bed bath behind accomplishment Sale – lease back deal with Oak Street, where it sold approximately 2.1 million square feet of commercial real estate and generated $250 million in revenue. Mark Triton, Bed Bath CEO at the time, described the deal as a move to raise capital to reinvest in the business. Now, though, Bed Bath faces another cash crunch as its sales plummet and Tritton was eliminated from his role earlier this week.

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

Kohl’s on Friday reaffirmed its plan to conduct a quick $500 million share buyback later this year. It cut revenue guidance for the second quarter of its second fiscal year, noting the recent slump in consumer demand amid decades of high inflation.

“It’s clear that the consumer is under more pressure today,” Kohl CEO Michelle Gass told CNBC in a phone interview. “We’re not immune to that…but Kohl’s stands for value. It is at times like these that it is more important than ever to amplify that message.”