Canadian company Empire Co. Ltd., the parent company of Sobeys and Canadian Tire Corp., was the first to reap the fruits of their share prices by spinning off store properties into publicly traded real estate investment trusts or REITs.
Hudson's Bay Co. governor Richard Baker has revealed that there will be two big deals that will involve spinning off Canadian/US real estate in an effort to raise more than $1 billion in cash.
Spinning properties into potential investments is now the new strategy. The key is to "capture the swollen value of properties by selling them, then lease back the stores," an article from The Globe and Mail revealed. This motif is also seen among US chains such as Sears Holdings Corp, Bon-Ton Stores Inc. and Darden Restaurants Inc., owner of the Olive Garden.
But a word of caution to interested investors: "Be careful. It's hard to separate the value of the buildings from the value of the business of selling stuff," the article also mentioned.
Consider how Macy's did it. The popular shopping chain has more than 800 stores and it owns about 575 of these stores. According to an analysis of the past summer's worth of the company conducted by Cowen & Co., Macy's properties were worth around $19 billion on an enterprise value including the equity and debt in these holdings. The financial services firm also estimated that the enterprise value of the company as a whole is around $30 billion and translating these numbers through the common shares of Macy's stocks, analysts have concluded that there is a potential increase of 24 percent in the share price.
However, selling properties does not remove the problems that are prevalent in the retail business such as management issues, financial headaches, deteriorating credit quality of the retail entity and eventually credit rating downgrades. Macy's however has already thought of a solution.
The retail giant has already sold a few stores. This past summer, it has sold and closed its store in downtown Pittsburg as well as five of its nine floors in an outlet in Brooklyn. Just this October, it has sold the top four floors of a large store in Seattle for a price of $65 million. Cowen estimated the rest of the chain's 570-odd owned stores are worth $12.4 billion.
Macy's shares dropped from more than $70 in July to $50 in October. With a market capitalization of about $16 billion -this is less than its real estate is supposedly worth. Therefore, analyst Joan Payson of Barclays concluded that earnings from "retail operations are weaker than expected."
Hudson's Bay Co. governor Richard Baker has revealed that there will be two big deals that will involve spinning off Canadian/US real estate in an effort to raise more than $1 billion in cash.
