Macy's: To REIT Or Not To REIT?
On Monday, Bank of America Merrill Lynch (BofA) analyst Lorraine Hutchinson published a research note, "To REIT or Not To REIT," raising the firm's target price for venerable department store owner and operator Macy's, Inc. (NYSE: M) from $68 to $78 per share.
BofA believes that management strategic focus regarding monetizing the value of Macy's real estate holdings may be ripe for a change, noting the recent Hudson's Bay joint ventures with mall giant Simon Property Group Inc (NYSE: SPG) and Canadian developer RioCan as an example.
Macy's owns a significant portion of its locations: 56 percent building and land (474 stores) – 16 percent subject to a long-term land lease (109 stores), while the company already leases 267 locations.
Included in the ownership pool is Macy's NYC flagship store, which is extremely valuable; based on recent Manhattan street retail transactions, it comes in at perhaps billions of dollars just for this one iconic property.
Tale Of The Tape: Real Estate Chatter
Last week, hedge fund Starboard Value's Jeff Smith spoke at the Delivering Alpha Conference and stated that Macy's was the fund's top idea, putting forth the idea of a $125 per share value.
Macy's shares skyrocketed on this presentation, as shown by the chart above. Smith broke out his $45 billion valuation as follows:
- 1) $17 billion Opco value
- 2) $8 billion in credit card value
- 3) $19 billion of realized real estate value (10 percent haircut to the $21 billion value)
- 4) $6 billion share repurchase plan and the pay-down of $1 billion in debt
BofA commented on the presentation, "Over half of the implied 75 percent upside comes from Macy's splitting the company into an operating company and a REIT and using new debt at Propco and existing cash to repurchase $6 billion of Macy's stock and pay down a portion of existing debt."
Tale Of The Tape: Past 5 Years
Department store rival Dillard's, Inc. (NYSE: DDS) filed for a REIT several years back. However, like Macy's, strong performance over the past few years has made monetizing real estate a low priority.
Hedge Fund Pressure
Starboard has been a serial "REIT-spin activist," trying to unlock shareholder value from owned corporate real estate. The hedge fund has recently pushed Darden Restaurants, Inc. (NYSE: DRI) management into considering a new real estate strategy, including its recently announced REIT and Olive Garden restaurant sale-leasebacks.
Darden expects to raise approximately $1 billion through these transactions, which can be used to reduce debt on its balance sheet. However, Darden's real estate strategy was a strategy choice, as it is for Macy's and Dillard's.
Real Estate Used For Survival
In the case of Sears Holdings, poor performance from core retail operations left the company no choice but to monetize some of the real estate on its balance sheet.
BofA On Macy's: Maintain Neutral, Raise PT From $68 To $78
The new BofA target price represents an approximate 8.3 percent upside from the previous price of around $72 per share.
BofA's new $78 PT is based upon 7.7x 2016E EV/EBITDA versus the 6.5x multiplier previously used to value Macy's.
Hutchinson explained, "While comps have slowed, we expect earnings growth to remain positive driven by share buybacks and cost cutting."
BofA On Macy's Fundamentals
BofA believes that the "upward estimate revisions and multiple expansion have played out. Earnings growth has slowed from a 30 percent F2010-13 CAGR as sales growth decelerates off a high base."
Essentially, fundamentals are not nearly as strong for Macy's core business, despite ongoing store investment and implementing new retail initiatives.
Macy's Real Estate Options
Hutchinson noted, "Macy's management team has produced strong sales growth, returned significant capital to shareholders and has controlled costs while investing in the business. The company prunes and optimizes its real estate every year with store closures and property sales."
BofA also noted how Macy's management views regarding real estate strategies has evolved during 2015, from being something unlikely to be considered at all to something that is being carefully considered, given the complexity of a potential OpCo/PropCo framework.
If Macy's can structure a JV arrangement to keep operational control of the real estate, BofA would not be surprised to see a new real estate strategy implemented by management.
Image Credit: Public Domain
Latest Ratings for M
|Feb 2017||Atlantic Equities||Upgrades||Neutral||Overweight|
|Feb 2017||Susquehanna||Initiates Coverage On||Neutral|
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