Macy’s and Other Retailers Are Pressured to Sell the Land Beneath Them
Companies are being pushed to sell real estate, but some see problems; ‘increased costs forever’
Macy’s is among retailers who have been pressured to sell real estate. Above, a Paramus, N.J., location. PHOTO: CLAUDIO PAPAPIETRO FOR THE WALL STREET JOURNAL
Retailers are coming under renewed pressure to cash in on their real estate as property values soar. But the approach has a mixed track record and poses risks at a time when chains are rapidly retooling their stores to support online operations.
Macy’s Inc. is the latest to wrestle with the option. The department-store chain is facing pressure from activist investor Starboard Value LP to spin off its property, a move the fund, which hasn’t disclosed the size of its Macy’s investment, thinks could boost shares in Macy’s by more than 70%. The retailer has said it is evaluating spinoffs and other property moves.
Companies from Target Corp. to Dillard’s Inc. have resisted similar pressures in the past. The concern is that selling stores to a separate entity and leasing them back would saddle retailers with debt-like rent payments and limit their ability to adapt to changing market conditions.
Mervyn’s offers a cautionary tale. After taking the middle-market department store through a buyout, the chain’s new private-equity owners split it into an operating company and a property company. The latter raised rents just as the economy teetered into recession. The company went out of business in 2008.
“We’ve looked at sale/lease-backs for 30 years, and it’s always come out the same way,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment-banking firm. “The retailer gets a bundle of money up front, but then they’ve saddled themselves with increased costs forever.”
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Macy’s executives have weighed the pros and cons of such deals over the years and come to similar conclusions, according to people familiar with the company. Recent financial engineering, however, is prompting investors and the company to take another look.
Hudson’s Bay Co., which owns a chain of Canadian department stores as well as Saks Fifth Avenue, created two joint ventures with mall owners Simon Property Group andRioCan Real Estate Investment Trust to hold real estate valued at about $3 billion. Shares of Hudson’s Bay have climbed 24% since the deal was announced in late February.
At the time of the deal, Hudson’s Bay retained an 80% stake in the ventures, which gives it a measure of control and a big share of the rent payments. Meanwhile, the separate venture lets investors see what the property is worth, and it could eventually sell its own shares to the public.
Starboard and other investors see several ways Macy’s could tap into the value of its real estate, according to people familiar with the matter. Among the choices being discussed are creating a separate, publicly traded real-estate investment trust to hold Macy’s mall stores and potentially some trophy properties, some of the people have said. Other options would be to mimic Hudson’s Bay’s partnership, or less sweeping moves, such as sale/lease-backs for various properties, or borrowing against the real estate to raise cash, the people said.
Not everyone is convinced. This past week, when William Ackman of Pershing Square Capital Management LP was asked at a conference whether he was a fan of sale/lease-back transactions, the hedge-fund manager said no. Mr. Ackman spoke before Starboard disclosed its Macy’s proposal at an investor conference.
It was a surprising answer for an activist who in 2008 launched a proxy fight against Target to spin off the land it owns into a publicly traded real-estate investment trust and lease it back, among other things.
Mr. Ackman wanted the Target leases to span 75 years, ensuring the company would retain control of its land. Most current sale/lease-back arrangements involve leases of 10 or 20 years, which can leave retailers vulnerable.
“If you are going to be in the business a long period of time, you want to control your real-estate assets,” Mr. Ackman said.
Target successfully fought off Mr. Ackman’s proposal, saying it would add too much cost and bring too much risk. New Target Chief Executive Brian Cornell has shown a willingness to make big changes, but the company remains reluctant to give up control of its real estate, a person familiar with the matter said.
The retailer is in the midst of numerous tests—such as changing how it lays out its stores, and using stores to ship orders—and wouldn’t want any related decisions slowed by having to seek landlord approval.
Still, the approach has a lot of fans, particularly given how real-estate prices have soared. The commercial property index that real-estate analysts Green Street Advisors use to track commercial-property prices is at an all-time high, up 18% from the last peak in 2007.
Loblaw Cos., a Canadian drugstore and supermarket chain, sold a significant portion of its real estate to Choice Properties Real Estate Investment Trust two years ago. Its shares climbed 39% between the deal’s announcement in December 2012 and the day of the REIT’s initial public offering in July 2013. Ten days after the IPO, Loblaw announced that it was acquiring Shoppers Drug Mart Corp. for a mix of cash and stock.
“Unlocking the value of the real estate gave them the currency to do the Shoppers acquisition,” said Kenric Tyghe, an analyst with Raymond James.
