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In this week’s , CoStar examined loans for properties in which two of the largest three tenants were either a Sears, Kmart or JCPenney anchor. All three retailers have Fitch Ratings of either B or CCC with negative outlooks.We identified 91 loans securitized before 2010 that were backed by such properties. The loans are delinquent or were not paid off at maturity on 22 of the 91 properties backing the loans, or 24%.

Six of the properties are owned and two more were in the process of foreclosure.

In addition, the borrowers had filed for bankruptcy protection on six of the properties; the loans were current on each of those properties.

The current balance on the 91 properties is $5.67 billion; the original balance was $6.33 billion.

On properties on which the loan is current, the loan-to-value averages 77%; on properties on which the loan is delinquent, the loan to value averages 189%.

Sears Holdings, which includes Kmart, has been scaling back its real estate footprint dramatically. It currently owns more than 200 million square feet of real estate and leases about twice that amount. In the past year, the venerable retailer has been transforming itself into a more nimble, less asset-intensive business. It has reduced its fixed cost structure by more than $500 million for the full year; it split off its Sears Hometown and Outlet stores; it has sold 14 real estate properties, generating $440 million in proceeds; and it has cut $1 billion from its lease costs since 2010. Sears has said it is in the renewal period for most of its leases and is using the to exit marginally performing stores.

J.C. Penney is taking a far different approach to its makeover by looking to create boutique “shops” within its stores. The retailer has about 1,100 stores with 111 million square feet of space. In partnering with such brands as Joe Fresh, Casa Bella, Dockers, Hagger, Martha Stewart, Michael Graves, Jonathan Adler and , Disney, Carters, Giggle and Sugar Shack, JCPenney plans to build out 63 million square feet in 2013 for the new store design.

Under this approach, JCPenney is comparing itself more to real estate landlords than other department stores.

“Let’s look at the large mall owners in United States. There are four; Simon, , Macerich and Taubman,” Ron Johnson, CEO of JCPenney told analysts this past month. “Simon, the largest, has 221 shopping centers they operate, their total square footage in the mall including the anchors (and ) the common area, is 188 million. They have 88 million square feet in specialty stores. GGP, the second largest, has 61 million square feet in specialty store space.”

“Within 36 months, the new will have 64 million square feet of space built out into specialty stores from the kind of brands you find in the mall,” Johnson continued.

JCPenney also has a growth strategy. It expects to start opening stores in 2015 if the new shop model proves out.

“There is a lot of growth opportunity for us,” Johnson said. “But we have to prove our model.”

Johnson said he believes JCPenney can eventually be bigger than Simon as it adds stores, and acknowledged that it was challenging for investors and analysts to properly value the retailer.

“How do you value something like this, are you owning the old JCPenney, are you owning JCP which is a start-up with pretty dramatic economic potential? Now, Simon is valued at $72 billion today. General Growth is at $33.8 million. Now, we are currently in the same business, and we are valued at $7 billion, interesting.”


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