Kohl's updates sale leaseback process

Kohl's has launched a competitive process for the sale and leaseback of its assets, reaching out to 20 different parties, CFO Jill Timm said.

Why it's the BFD: Kohl's was under pressure from Macellum Capital Management to monetize its real estate, as part of the activist investor's proxy contest earlier this year.

• The retailer started eyeing a sale-leaseback after its M&A negotiations with Franchise Group broke down during the summer.

Details: "I really look at (it) through a lens of how I maintain my financial flexibility and retain the strength of our balance sheet," Timm said, speaking at Goldman Sachs' 29th Global Retailing Conference in New York yesterday.

• The department store chain is weighing whether a possible deal will include its stores or its distribution network, she said.
• A transaction is dependent on cap rates, rent escalation clauses, and the length of the lease term.
• Kohl's is not interested in signing a 20-year lease term, given how fast the world is changing, Timm said.

Flashback: Timm pointed out that Kohl's conducted a sale-leaseback of two of its distribution centers during the pandemic at a cap rate of 4.5% on a five-year lease term.

• She noted that the cap rate was lower than the interest rate on a bond it placed around the same time and that the short length of the lease gave the company financial flexibility.

Catch up fast: Last week Reuters reported that Oak Street Real Estate Capital had made a bid to buy as much as $2 billion worth of Kohl's real estate.

• Oak Street has already completed similar deals with big box retailers, including Bed Bath & Beyond and Big Lots.

• Kohl's, however, declined to comment on that report.

Between the lines: Proceeds from a sale-leaseback could not only pay down more expensive debt — but could also be used to unwind some of Kohl's real estate that it already intends to exit.

• Timm said during the presentation that Kohl's is committed to paying off debt, specifically its notes due 2023, to decrease its leverage and back to an investment grade rating.
• As of July 30, the company had nearly $1.75 billion in long-term unsecured debt, including outstanding amounts of $164 million on 3.25% notes due 2023 and $111 million on 4.75% notes due 2023, according to SEC filings.