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Will Macyʼs make a $4B bet on a Real Estate Investment Trust?

Macyʼs could sell its flagship Herald Square store for as much as $4 billion if it jumps on the latest trend among retailers.

The Macy's property could be worth up to $4 billion.
The Macy’s property could be worth up to $4 billion.

With New York City property prices constantly flirting with record highs, some retailers are now looking to maximize returns on their real estate assets by establishing publicly traded real estate investment trusts, a move that experts say provides short term gains in exchange for future uncertainty.

The trend-setters have already fired the first shots.

Last June, Darden Restaurants, which owns eateries such as Olive Garden and the Capital Grille, announced that it was transferring 430 of its 1,500 restaurant locations to a REIT, exhibiting a retail industry more willing to part with assets to create more attractive balance sheets.

Department store chain Sears, on the other hand, formed a REIT called Seritage Growth Properties last June, spinning off 254 Sears and Kmart locations to the new entity. REITs, which pay very low taxes as long as most of the earnings are distributed to investors, provide retailers with funds to repay debts and boost returns on capital. Sears, for instance, raised $2.5 billion in proceeds to offset losses from its department store operations.

“The idea is that these retailers want to unlock the value of the underlying real estate asset,” said Mary Ann Hallenborg, a clinical assistant professor of real estate at NYU’s Schack Institute of Real Estate.

“The commercial real estate market has rebounded. So this is a great way to capitalize on the increasing market value of these properties.”

While the strategy sounds like a solid play for retailers, it also creates some risks.


Steven Soutendijk, the executive director of Cushman and Wakefield’s Retail Services Group, warned that the strategy is tantamount to “mortgaging the future.”

“There’s a downside to it. It’s not a cure-all or a magic bullet because the retailer then loses control of that real estate and ten, 15 years down the road, they might not be able to afford it,” he said.

The newest retailer to explore this option is Macy’s, which owns trophy properties such as its flagship store in Herald Square in Manhattan.

Earlier this year, the retailer disclosed that it is looking into the strategy, perhaps prompted by a push from activist investor Starboard Value.

Macy’s real estate assets account for about 72 percent of the company’s $29 billion value, and projections have stock prices rising to as high as $125 per share if a REIT spin-off happens. The stock closed at $57.86 on Monday.

It’s unclear how much its flagship store is worth. However, a recent Wall Street Journal report revealed estimates that go from under $3 billion to $4 billion.

According to Faith Hope Consolo, the chairman of Prudential Douglas Elliman’s retail leasing and sales division, the property, which provides 1.1 million s/f of space and almost occupies a whole city block, has recession-proof appeal and may attract an overzealous buyer.


“That kind of property has value good times, bad times, all the time. They probably have more bidders than they know what to do with,” she said. “There just might be another investor that not only overpays, but (goes) over the top.”

In spite of the attractive potential pay-offs, Soutendijk warns of long-term risk. “I think Macy’s would find it very challenging if they didn’t own their flagship store to rent that flagship store and make money out of it,” he said.

“I think it’s a much bigger issue here in Manhattan where rent is so much higher. That’s also one of the reasons why buildings are that much more valuable. But it probably also shortens the period in which the retailer won’t be able to afford it if they sold it and then leased it back.”

While there’s not enough of a sample size to thoroughly evaluate the effectiveness of REIT spin-offs, the early returns show positive signs. Seritage Growth Properties brought in $1.6 billion through its rights offering last July. The company’s stock opened at $36.02 per share on the New York Stock Exchange. That price represents the lowest point for the stock. Seritage stocks closed at $41.55 last Monday.

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