Macy’s Inc. now has an activist investor calling for the spin-off of its real estate holdings.
Shares of Macy’s on Wednesday jumped 7.9 percent to close at $72.01 after Starboard Value’s Jeffrey Smith disclosed his investment in the retailer. More than 23.5 million shares changed hands, compared with a three-month average volume of 4.7 million. The market capitalization of Macy’s at the end of Wednesday’s trading session was $24.22 billion — a $1.72 billion increase in a single day driven by Starboard’s disclosure that it’s an investor in Macy’s. Smith did not disclose his firm’s exact stake in the retailer.
Smith made the disclosure at CNBC and Institutional Investor’s joint Delivering Alpha conference in Manhattan Wednesday. CNBC, which has a running blog of the conference, said Smith believes the stock can run higher, to as much as $125 a share. The activist hedge manager cited the high values of Macy’s retail properties, according to the CNBC blog.
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Macy’s issued a statement Wednesday saying, “We work continuously to maximize shareholder value and exchange views with a wide variety of shareholders as we do so. This is an ongoing process of disciplined allocation of capital that has included share repurchases, increased dividends and continued investments in our business, which has led to superior operating performance compared to the majority of our competitors. Note that Macy’s Inc.’s total shareholder return over the past six years has been 700 percent.
“Our real estate strategy is to have a mix of owned and leased stores in order to maximize both profitability and operational flexibility,” the company added. “We continuously evaluate all our locations and their retail and alternative use values. For example, we recently sold and have exited — or are exiting — several Macy’s locations, including in Cupertino, Calif., and in downtown Pittsburgh, to make way for redevelopment projects. We recognize the potential attractiveness of real estate investment trusts and similar alternative real estate ownership structures in today’s marketplace. We are currently evaluating those structures including analyzing the various economic, tax, operational and other issues associated with them.”
Macy’s statement came after Smith reportedly said at the conference that he believes Macy’s is “receptive to looking into this opportunity.”
It couldn’t be immediately confirmed whether Starboard has made any overtures to Macy’s about its real estate ideas.
In May, during the retailer’s conference call following its first-quarter earnings report, Macy’s chief financial officer Karen M. Hoguet, told analysts: “When it comes to real estate, the first thing I would say is this is far more complicated than what most people think. And some of the estimates of value in our real estate, I think, have been done overly simplistically….We are studying closely with our key banking partners all the various transactions that have happened lately and all the possible strategies, the pros, the cons, of how you would do it, et cetera, et cetera, to see what’s right for us. Our objective is always to maximize value. And up until now, we haven’t seen an opportunity that made sense in terms of a global strategy.”
Smith is an activist hedge fund manager, and the chief executive officer of Starboard. The fund agitated for change at Darden Restaurants and at Yahoo, as well as the merger of Staples and Office Depot.
Starboard values Macy’s Herald Square flagship at about $4 billion, with the San Francisco and Chicago properties are valued at more than $1 billion. That’s not including 400 mall sites at about $13 billion. Starboard has the combined value of Macy’s real estate at $21 billion, representing a substantial component of the company’s $29 billion enterprise value.
Smith spoke at the conference about unlocking the real estate values, noting that forming a REIT is one option. Another would be a joint venture. That idea is premised on the creation of two businesses, one for the real estate and the other for the operating business. Smith reportedly noted that Macy’s also garners substantial earnings from its credit card business.
In the retail world, Sears Holdings Inc. last week completed the spin-off of some of its real estate into a REIT called Seritage Growth Properties, while Hudson’s Bay Co. and Simon Property Group in February created a $1.8 billion joint venture in connection with some of Hudson’s Bay properties, including the Saks Fifth Avenue Beverly Hills flagship and the Westchester and Manhasset Lord & Taylor stores. The joint venture does not include Saks’ Manhattan flagship or the Lord & Taylor store on Fifth Avenue.
While investors may be cheering the idea of a spin-off some of Macy’s real estate holdings, some financial and industry executives weren’t immediately impressed with the idea.
One factor, who finances many of the vendors that sell to Macy’s, said he wasn’t sure it was in the retailer’s best interest, while another executive at a financing firm pointed out that a spin-off would likely leave the operating company with a load of debt.
To be sure, Macy’s said during its first quarter conference call that it is developing a strategy to focus on its top 150 doors, and in particular to what it calls its “30 platinum doors, our very best.” Hoguet said the doors were selected based on different factors such as sales growth and economic factors in their markets. “We believe there is opportunity to elevate these stores further and accelerate their growth and hopefully we will begin to see the benefit this fall, particularly in Q4,” the cfo said.
How that strategy would factor into any real estate play — whether the top doors would stay with the core Macy’s operation or be shifted to a REIT — should Macy’s bow to Starboard’s demand is unclear. It’s also unclear whether Starboard’s stake is big enough to exert real pressure, although Fortune last year dubbed Smith “the investor ceo’s fear most.”
An executive at a services firm that works with many of Macy’s vendors said past examples of when activist firms tried to push for an “unlocking of assets” to boost shareholder value show those ideas weren’t necessarily deemed in the best interest of the targeted firm. One example that comes to mind is Pershing Square Capital Management’s William Ackman, who beginning in 2007 began pushing Target Corp. to sell the land under its stores and move those assets into a REIT. Target refused, but did later sell half of its credit card business even though Ackman had pushed for the sale of the entire credit card portfolio. Ackman ultimately sold his stake in Target around 2009. He pushed management into a proxy battle at a time when analysts thought Target’s management team was doing a decent job running the business.
Starboard is a $3 billion hedge fund began by Smith, Mark Mitchell and Peter Feld in March 2011. Smith gets kudos for accomplishing what many of his better-known activists rarely have accomplished: The replacement of the entire 12-member board at Darden following a proxy battle.
While it’s too soon to predict whether Smith might go the route of a proxy battle with Macy’s, one thing is clear: Activism seems to be the investment strategy du jour for many hedge funds, with more than $100 billion under management.