By Suzanne Kapner
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."
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 and RioCan 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.
David Benoit and Paul Ziobro contributed to this article.
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com
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