There was not much doubt that J.C. Penney Co. Inc. (NYSE: JCP) would file for bankruptcy protection. After markets closed on Friday, the company filed its reorganization plan in the Southern District of Texas Bankruptcy Court. J.C. Penney stock traded down nearly 20% early Monday, at around $0.19 per share.

The company claims to have $500 million in cash and access to $900 million in debtor-in-possession financing (DIP), including $450 million from its first-lien debtholders. By shelling out for the DIP financing, those first-lien creditors are protecting their investment. DIP lenders jump to the head of the lineup at the pay window when a bankrupt company’s are reorganized or sold off.

J.C. Penney’s Bankruptcy Plan Is Mainly About Real Estate

Earlier this year, J.C. Penney released two slides the company used in an effort to secure additional financing. There were no takers.

The presentation, which was based on J.C. Penney’s store count at the end of 2018, revealed a lot about how potential lenders looked at the retailer’s real estate.

Of 622 stores that were open (or “lit” in retail lingo) and had been appraised, 285 were unencumbered. Of that number, 45 were ground leases and the rest were leased in shopping centers and malls. The ground-leased stores that were operating carried an appraised value of $259 million, and the 245 operating leased locations were valued at $487 million.

J.C. Penney owned 55 operating stores with an appraised value of $651 million. All told, J.C. Penney reported 350 unencumbered operating properties with a total value of $1.4 billion. If the stores were closed (or “dark”), the appraised value drops to $696 million.

There is little to no chance that J.C. Penney’s unencumbered properties have increased in value. If anything, the COVID-19 pandemic has made them worth even less.

J.C. Penney’s Big Creditors

As part of its filing, J.C. Penney had to list its top 50 creditors. Wilmington Trust holds about $1.3 billion in the company’s senior notes and holds the top four positions on J.C. Penney’s list of creditors and five of the top 10. The other 45 top creditors are all vendors. The largest named trade creditor is Nike Inc. (NYSE: NKE), to which J.C. Penney owes $32.1 million.

One of the company’s largest creditors is H/2 Capital Partners, a firm that participated in the bankruptcy and liquidation of Toys “R” Us. According to a Bloomberg report, H/2 holds about half of J.C. Penney’s $450 million in senior notes and about the same amount in the proposed DIP financing package.

In a statement, H/2 said that J.C. Penney “can and should” succeed in a reorganization plan that significantly reduces the retailer’s leverage. The firm also said it opposed the liquidation of Toys “R” Us, even though other firms involved in the transaction pointed the finger at the company for refusing to negotiate a rescue plan.

Will Creating a REIT Help?

As part of the reorganization plan, some of J.C. Penney’s creditors have suggested establishing a real estate investment trust (REIT) to hold a portion of the company’s real estate assets.

This may appear to be a solution, but it hasn’t worked out too well for Sears. When that venerable company was struggling, controlling shareholder Eddie Lampert hived off the company’s real estate in 2015 into a REIT called Seritage Growth Properties (NYSE: SRG).

Seritage had traded about 10% above its original price of around $34 until the COVID-19 pandemic struck. Shares traded at about $7.30 on March 18.

The problem is not the REIT structure. It’s the expected value of commercial real estate during the just-beginning recovery from the pandemic. A call from an analyst at Cowen Monday morning effectively said that “mall valuations are likely pressured [and] real estate liquidity could be paused.”

The Seritage experience and a more recent attempt to monetize Hudson’s Bay real estate holdings through a REIT have not been positive. Seritage traded near $57 a share at its height in 2016, a nice gain, but not one it could hold. Macy’s Inc. (NYSE: M) also has looked at issuing new debt backed by the 342 Macy’s and Bloomingdale’s stores it owns. The response has been underwhelming.

The Fed and the Treasury Did Their Best

In late March, the Federal Reserve announced an open-ended purchase program for Treasury securities and mortgage-backed securities, including commercial mortgage-backed securities like those issued by J.C. Penney, Macy’s and other big retailers.

REITs are having a worse year than the S&P 500, down nearly 20% compared to just under 12% for the index. Retail real estate will not be making a big comeback quickly, and there is some doubt about whether it will ever be worth what it was at the beginning of the year. Store traffic has been approximately zero at U.S. department stores, and J.C. Penney, among others, has had to close stores to keep expenses under control.

The problem with that strategy is that closed stores, those not selling merchandise and services, don’t produce any revenue, even in better times. In good times, retailers hope to boost sales at better-performing stores. Now, no stores would qualify as better performers.

J.C. Penney expects to close 200 stores this year and another 50 next year, according to its bankruptcy filing. That’s about 30% of the total number of stores that were open when the state and local shutdown orders were announced. To expect that all those stores will reopen is fantasy.

Shares of J.C. Penney traded down more than 19% late on Monday to $0.19. The stock’s 52-week trading range is $0.14 to $1.26. The stock market gave up on the company more than a year ago, and now with the stock on its way down to zero, just the lawyers, bankers and employees who are about to lose their jobs are paying attention.

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