These Analysts Say a Macy's REIT Is Unlikely - Macy's (NYSE:M)

Since July's Delivering Alpha Conference when Starboard Value suggested a REIT, Macy's, Inc. M has declined 17.5 percent.

Morgan Stanley's Kimberly Greenberger took issue with Starboard's forecast that Macy's could rise to $125 with a REIT spinoff, noting that it is more likely to gain to just $68.

That still equates to a potential 24 percent increase over current price, but does not justify burdening Macy's operating with "significant rent obligations" in the spin.

With investor focus on retail and restaurant REITs expanding, Morgan Stanley took a look at whether Macy's should pursue a dual REIT, operating company structure.

The issue was given increased prominence when Starboard Value's Jeff Smith said that Macy's was the fund's top idea – noting that with a REIT structure, it could more than double to $125 per share.

In conjunction with the firm's REIT analysts, Morgan Stanley's Kimberly Greenberger said that Macy's stores have a real estate value of $18.5 billion. Combining that value with a 6.3x multiple for Macy's EV/EBITDA, Greenberger suggested a more conservative value of $68 if management were to spin off assets.

Is It Worth It?

That modest gain is just not worth "burdening the OpCo with significant rent obligations and reducing operational flexibility," particularly over the long term. Further, Morgan Stanley cautioned that the IRS has changed it procedures, noting that it would not provide "private letter rulings" for REIT transactions. That creates "increased tax risk," according to the analysts.

Instead, a better strategy would be if Macy's "opportunistically" monetized real estate assets when "the proceeds of a location (or part of a location) are greater than the present value of future operating cash flows," which was the case in two recent transactions – in Brooklyn and Pittsburgh.

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