J.C. Penney Company, Inc. (NYSE:JCP) fell to a three-year low after its second largest shareholder Vornado Realty Trust (NYSE:VNO) dumped 40 percent of its stake in the struggling department-store chain on Monday. The real estate investment trust offloaded 10 million J.C. Penney shares through Deutsche Bank AG (NYSE:DB) (ETR:DBK) at $16.40, people familiar with the offering told The Wall Street Journal.

jcpenney logo

J.C. Penney Company, Inc. (NYSE:JCP) shares declined 9.44 percent to $15.16 at 11:13 AM EST. The company’s shares are already down more than 50 percent in the last 12 months. Vornado Realty Trust (NYSE:VNO) shares rose 3.09 percent to $83.87. The report of the stake sale came after J.C. Penney reported a 25 percent decline in its annual revenues to $13 billion with a net loss of $985 million.

The disastrous earnings report started a flurry of criticism on CEO Ron Johnson’s turnaround strategy. Vornado chairman Steven Roth joined hedge fund manager Bill Ackman in early 2011 to turn J.C. Penney around. They hired former head of Apple Inc. (NASDAQ:AAPL)’s retail business head Ron Johnson in November 2011 to change the fortunes of the struggling company.

J.C. Penney continued to lose customers as Johnson launched the “everyday low prices” strategy to transform the company. The results haven’t been impressive. Looks like Pershing Square Capital Management chief Bill Ackman’s two biggest trades are turning against him. His big short bet against Herbalife isn’t moving in the right direction either. As of December 31, Ackman owned 17.8 percent or 39.1 million shares of J.C. Penney Company, Inc. (NYSE:JCP).

Vornado Realty Trust (NYSE:VNO) was the second biggest shareholder in the retailer with 23.4 million shares before the offering. The REIT last week reported a loss of $224.9 million on its 10.7 percent stake in J.C. Penney. Vornado chairman Steven Roth is a director in J.C. Penney’s board. During a conference call last week, Roth said his role as a J.C. Penney director may compromise his firm’s ability to exit its holdings in the struggling retailer. Steven Roth is likely to leave Bill Ackman alone on J.C. Penney Company board.

J.C. Penney has received a downgrade from BAML today on the news.

BAML notes:

Our work indicates that monetizing J.C. Penney’s real estate would be difficult and substantially less lucrative than the market initially thought. We are lowering our PO by $3 to $13 as we think the stock will remain under pressure due to deteriorating investor confidence in J.C. Penney’s turnaround, and we reiterate our Underperform rating.

In our recent department store real estate note, we evaluated the likelihood of J.C. Penney splitting itself into two publicly traded companies — a standalone REIT and an operating company. We concluded that JCPenney’s retail fundamentals are not sound enough to support a standalone operating company and we do not think REIT investors have an appetite for owning single tenant mall anchor real estate. Vornado’s liquidation of its J.C. Penney stake supports our view that this was simply a non-core investment, without strategic purposes.

J.C. Penney’s balance sheet looks OK today but deteriorating fundamentals should cause pressure in 2013. The company has access to $3.1bn of liquidity including $0.85bn of cash (excluding deferred vendor payments made in 1Q), $1.85bn of revolver capacity, and a $0.4bn accordion on the revolver. J.C. Penney intends to self-fund its transformation, but we think it will need to draw down on the revolver as early as this quarter.