By Liam Pleven
Macy's Inc. is the latest major retailer to consider spinning
off its real-estate assets into a separate company, following
recent moves by Sears Holdings Corp. and Darden Restaurants
Inc.
But first it will have to answer a thorny question: what to do
with its prized asset, the landmark building at New York's Herald
Square?
Its decision could point the way for other retailers that own
trophy properties, a group that includes Nordstrom Inc. and Neiman
Marcus Group Inc. Like Macy's, their crown jewels are in prime
locations in major metropolitan areas, making them more valuable
than look-alike properties in malls or smaller cities.
Unloading the Herald Square building could make a lot of money
for Macy's shareholders now, while finding a way to extract some
value without ceding control of such a prime location could pay off
more in the long run, according to analysts.
Herald Square is especially tricky because there is no consensus
on precisely how much the property is worth, with estimates ranging
from less than $3 billion to more than $4 billion.
"The hard part is, there's nothing like Macy's Herald Square,"
said Jim Costello, senior vice president at Real Capital Analytics,
a real-estate research firm.
Investors have been pressuring Macy's and other retailers in
recent years to spin off their real-estate assets into separate
companies. The aim is to make the most of those assets at a time
when commercial real-estate values are soaring and the retailers
face long-term challenges from online rivals.
Macy's earlier this month said real-estate prices have prompted
it to study its options. The company owns 556 stores from Puerto
Rico to Guam, most of them nondescript. Its flagship store,
however, covers almost an entire New York City block, features
about 1.1 million square feet of retail space, includes additional
space for offices and storage, and serves as the endpoint for
Macy's annual Thanksgiving Day parade.
That distinguishes its portfolio from those of retailers whose
strategy revolves around owning and operating stores of a similar
size in residential neighborhoods or strip malls around the
country.
Some other retailers also have crown jewels. Nordstrom owns its
flagship store on Pine Street in Seattle, which has 383,000 square
feet of retail space. Tiffany & Co. bought its store on Fifth
Avenue in Manhattan in 1999, after it had been sold by the jeweler
and leased back in a previous deal. Neiman Marcus, which is
planning an initial public offering of its stock, has a portfolio
that includes stores in San Francisco, Dallas and Beverly Hills,
Calif.
"Often, there's additional value that can be gained from having
those primary locations," said Adam Silverman, a retail analyst at
Forrester Research. "The cookie-cutter locations may not drive as
much traffic or the right kind of clientele."
Activist investor Starboard Value LP last month said it had
taken a stake in Macy's, and chief executive Jeff Smith said at the
time the building was worth about $4 billion, based on an
assessment by real-estate experts.
Analysts at investment bank Cowen & Co., where Mr. Smith
once worked, were less bullish, pegging the value at $3.3 billion
in a July report. And Robert Von Ancken, chairman of Landauer
Valuation & Advisory, a unit of real-estate firm Newmark Grubb
Knight Frank, said in an interview he was skeptical the Herald
Square building was worth more than $3 billion.
"The real answer is, we don't know," said Jim Sluzewski, a
Macy's spokesman. "And that's why we have teams of people looking
at the question."
The company has hired real-estate firm Green Street Advisors,
tax experts at law firm Skadden, Arps, Slate, Meagher & Flom
LLP, and bankers including Goldman Sachs Group Inc. and Credit
Suisse Group AG, among others, to study its real-estate
portfolio.
Investors have bid down Macy's shares amid questions about its
real estate and its financial results. Since hitting a peak for the
year on July 16, the day after Starboard Value disclosed its stake,
Macy's shares have dropped 22%, through Monday's close. At that
share price, Macy's market value is about $19 billion, according to
FactSet, less than the $21 billion Starboard believes the company's
real estate alone is worth, and roughly equal to Cowen's estimate
of nearly $19 billion. Cowen concluded that the company's second
most-valuable store, in Chicago, is worth about $1.7 billion.
Creating a new company to own the real estate is one option, but
that could saddle Macy's with rent payments and force it to cede
control of the building.
This month, Macy's announced a different real-estate deal that
could be a model. The company said it was selling off part of its
store in downtown Brooklyn and a nearby parking garage to developer
Tishman Speyer for $170 million in cash and another $100 million
over three years. It will compress its existing retail operations
at the site into 310,000 square feet on five floors, down from
378,000 square feet on eight floors.
A similar plan could be lucrative in Herald Square, where the
upper floors could be converted into condominiums or a hotel,
according to analysts.
"There is clearly impressive potential," said James Sullivan, a
senior real-estate analyst at Cowen. "That is the path to the
highest value creation for the Herald Square store."
Write to Liam Pleven at liam.pleven@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
August 25, 2015 12:59 ET (16:59 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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