Macy’s is taking a hard look at its real estate assets. In March the company named William H. Lenehan, president and CEO of Four Corners Property Trust, to its board to advise on ways to maximize the profit potential of the real estate portfolio. “Bill will contribute to our board’s expertise and working knowledge on matters related to real estate, an important area of activity as we work to create shareholder value through joint ventures or other partnerships related to Macy’s flagship stores and mall properties,” said Terry J. Lundgren, chairman and CEO of Macy’s, Inc., in a prepared statement. “Bill’s perspective is rooted in his real estate experience in a variety of industry sectors, including net lease, restaurants, mall, office, residential and mixed use.”
Lenehan, 39, became president and CEO of Four Corners, a publicly traded REIT specializing in food-service real estate, last August. He had been a special adviser to the board of EVOQ Properties, owner of a substantial portfolio of development assets in downtown Los Angeles; interim CEO of the former MI Developments, a real estate operating company now called Granite Real Estate Investment Trust; and an investment professional within the real estate group of Farallon Capital Management.
Even before Lenehan’s appointment, there were indications that deals were ramping up this year. In February Macy’s disclosed the marketing of potential partnerships and joint ventures for its mall-based stores. The company is also working with investment brokerage Eastdil Secured to find venture partners for its flagships in Chicago, Minneapolis, New York City and San Francisco. One source pegs the value of the New York City flagship store alone at nearly $4 billion. “Just floating the idea out there has generated an excellent response,” said Lundgren. “I think you will see some activity this year. I can’t predict when, though. We were working on [the Brooklyn, N.Y., deal] for over a year before we had a deal consummated.”
Macy’s largest deal to date kicked off last year with developer Tishman Speyer, to which the company sold the top five floors of its downtown Brooklyn store, along with an adjacent parking garage with development rights, for $170 million. Tishman Speyer is building 10 floors of office space above the retail. The deal, which includes the renovation of the retail space Macy’s is hanging onto, will ultimately be worth $250 million to Macy’s.
In another major redevelopment, the Macy’s building on Seattle’s Pine Street is undergoing a similar rebuild, with the top four floors sold and slated to be converted into office space. Macy’s closed its downtown Pittsburgh store and sold the site to Philadelphia-based Core Realty, which is planning a major mixed-use redevelopment for the historic building.
Deals like these take time and patience because of legal and tax considerations, Lundgren points out, but they do get done. “The process is moving along very swiftly, and I think no one could criticize us for the speed in which this work is taking place,” he said. “They could, but they would be wrong.”
Macy’s has indicated that several individual transactions will equate to $235 million in real estate income this year, up from $220 million last year. At the end of March, Macy’s sold two buildings at Westfield Mission Valley mall, in San Diego, to Westfield for about $16.5 million. One of those is a store that Macy’s occupies, and which it will lease back.
There could be more deals still. “We very well may see them take action on one of their top three or four buildings,” said Paul Trussell, a Deutsche Bank retail analyst. “I think they will do what they said they’ll do, and that is to monetize a number of individual properties. And on top of that we may see one of the flagships, like the Chicago State Street store, have a very sizable impact, similar to what we saw with Brooklyn. That could very well be a billion-dollar deal.”
Potential buyers include institutional investors, according to Jim Costello, a senior vice president at Real Capital Analytics. “These funds have a fair number of cross-border investors behind the scenes and have been net buyers of retail properties over the last few years.”
In addition to doing deals, Macy’s has announced store closures on an annual basis in recent years. All signs point to a continued pruning of its mall-stores portfolio. Last year Macy’s announced that it would shutter 40 mall stores. “Maybe in the near term we will not see the pace of closings that we have in recent years for them, which has been meaningful, but I don’t suspect it is over for Macy’s,” said Trussell.
Is there a potential upside to many of the Macy’s closures, though? “Mall owners are typically enthusiastic about getting space back,” said John Bucksbaum, CEO and founder of Chicago-based -development firm Bucksbaum Retail Properties. “No matter how good the department store might be doing, sometimes there is the thought that you could be even more productive and you could generate greater rents out of some of that space if it didn’t fall under the four walls of the department store.”
Repurposing the boxes is another viable option, according to Daniel J. Busch, a senior mall analyst at Green Street Advisors. “We think that, over time, they can create more value by putting in restaurants or a movie theater,” Busch said. “It needs to be something that is more relevant to today’s consumers.”
Several major retailers have become REITs or have looked into doing so. But though activist Macy’s shareholder -Starboard Value LP, a New York City–based investment firm, pushed Macy’s to adopt its own REIT proposal last year, Lundgren boldly ruled out the move last November.
Even a joint venture for its mall stores is looking -questionable to some. “I don’t know who that partner would be, and I don’t know the rationale behind the REITs doing that type of partnership to begin with,” said Trussell. “It is very complicated, and it in essence would require Macy’s to put even more pressure on its own operating structure. You own a building outright and you are going to opt to now start paying market rent? It is very difficult to see.”
Starboard is a self-described activist investment adviser that takes stakes in publicly traded companies with the express intent of forcing management to maximize shareholder value. With Macy’s, Starboard has put a sharp point on its value calculations, estimating Macy’s real estate assets to be worth about $21 billion. By most accounts, with nearly 900 stores across the U.S., Macy’s owns and operates some of the most valuable retail real estate assets in the world. To unlock that value, Starboard wants Macy’s to place its real estate into two separate joint ventures — one for its iconic downtown properties and the other for its mall stores.
That could be a goldmine for Starboard. “We believe Macy’s will be worth approximately $70 per share after this initial step, creating about $10 billion in new shareholder value,” said Jeffrey C. Smith, a Starboard managing member. (Macy’s shares were trading at about $40 at press time.)
As a second step, Starboard wants Macy’s to consider alternatives for its owned stores in secondary or ‘C’ locations and several other places, including Brooklyn and Seattle, plus ground-leased mall stores and owned distribution centers — all valued at an aggregate $4 billion, according to Starboard.
Doing any financial engineering could ultimately generate loads of cash for Macy’s, with the question being how it would spend the money. Starboard would love to see funds from the real estate sales used to pay down debt, to buy back shares or to invest in a variety of growth initiatives.
Interestingly, one option would be for Macy’s to reinvest in retailing. “Who’s to say,” said Trussell, “that Macy’s wouldn’t venture out and look for another website to own and be under its umbrella? Who’s to say they would not look to acquire a small specialty chain or off-price chain? There are a lot of opportunities for Macy’s to change the
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