Tuesday, Reuters reported that several hedge funds have asked the U.S. department store heavyweight to consider options for its real estate, including selling a few major sites and then leasing them back to Macy's. The maneuver is called a "sale-leaseback transaction."
According to the report, multiple unnamed hedge funds have amassed stakes in Macy's in recent months, and have held conversations with management about implementing the strategy. Macy's and its financial advisers have been listening to the proposals, according to the Reuters report.
Shares of Macy's recently rose nearly 2% to $68.
The news confirms a report by TheStreet on May 13, which highlighted the prospect of such a real estate transaction. "We are studying various transactions and their pros and cons", said Macy's CFO Karen Hoguet on the company's first quarter call on the topic of monetizing its real estate holdings.
"We are getting questions also," Hoguet replied in answer to a stock analyst who said he had received inquires from his firm's investors on the issue. According to Hoguet at the time, Macy's was studying "many" opportunities, but noted that so far, nothing had made strategic sense and any deal involving real estate would be complicated.
It wouldn't be the first time Macy's has generated cash by unloading real estate. Last October, Macy's sold its Cupertino, Calif., location to real estate developer Sand Hill Property for an undisclosed amount. Macy's joined fellow mall anchors J.C. Penney (JCP) and Sears Holdings (SHLD) in selling their Cupertino locations to Sand Hill.
Macy's shares have modestly outperformed the S&P 500 over the past year, rising about 13%. But several quarters of weak growth may be masking the full value of the company, which, of course, includes its real estate holdings.
The retailer's market cap is about $23 billion, but the value of its property, plant and equipment is listed at $7.7 billion. Macy's new, unnamed large shareholders could certainly argue the company deserves a higher valuation given its prominent locations such as those in New York's Herald Square and other highly trafficked tourist destinations.
With property values back on the rise, sale-leaseback transactions by department stores are coming back in favor. For instance, beleaguered competitor Sears has essentially stayed alive by selling off real estate.
In April, Sears formed a real estate investment trust that will acquire about 254 of its properties, a maneuver expected to generate more than $2.5 billion. Sears' total market cap has been whittled away to just $4.5 billion, due to years of mounting losses from its steady loss of market share.