Macy's senior management has acknowledged the need to unlock at least a portion of the value of the retailer's real estate holdings as it addresses a bid to buy the company.
Analysts and investors have been pondering what the department store's real estate holdings would sell for in today's market. Early analyst estimates have ranged from as low as $5 billion to as high as $14 billion, with the wide range highlighting the difficulty in valuing such a large, niche real estate portfolio.
The value is somewhere in the middle of that range, according to two scenarios used to calculate the value of the chain's real estate. Here's how that judgment was reached:
Like most other department store anchors, Macy's real estate portfolio is a mix of owned, ground-leased and direct-leased stores supported by a relatively small network of distribution properties.
As of February, Macy's operated 718 stores encompassing over 110.2 million square feet of retail space. This includes 435 Macy's department stores, 46 Macy's furniture stores, 12 small-format Market by Macy's stores, and nine freestanding Macy's Backstage locations. In addition, Macy's operates 57 Bloomingdale locations, including 32 full department stores and 159 Bluemercury cosmetics and skin care locations.
Of its 718 total stores in the portfolio, Macy's owns 286, with 90 of the company-owned locations under ground leases, and the remaining 342 leased directly from property owners, which include all small-format and Bluemercury stores.
Most of Macy's owned real estate consists of large department stores anchoring enclosed malls. Given recent shifts in tenant space usage, these properties would be challenging to backfill with new tenants given their size and format, and as such, the value would be limited to the site value if Macy's were to vacate.
While Macy's real estate assets are generally in valuable locations and include large swaths of parking — increasing the potential proceeds a sale could fetch — site values will typically be much lower for sites that Macy's plans to close than the value of the cash flows in a sale-leaseback transaction for stores Macy's plans to remain in over the long term.
However, establishing an estimated value in a sale-leaseback transaction requires information not available in a hypothetical value scenario. As such, the value of Macy's owned real estate was estimated under both redevelopment and sale-leaseback scenarios.
Under the first scenario, Macy's owned properties are valued as a redevelopment opportunity based on the average price per acre cost of vacant retail sites sold within a 3-mile radius of each owned Macy's store over the past two years.
The value derived from this first method should be viewed as a loose estimate of the value of the owned real estate if it is sold vacant. This scenario resulted in a total estimated value of $7.9 billion, which equates to a little less than $2.1 million per acre, pricing that certainly reflects the valuable locations of most Macy's stores, though is subject to much variance depending on the specific location of the store.
While this method helps establish a reasonable estimate, it likely understates the value Macy's would receive via a sale-leaseback for properties in which it plans to remain operating over the longer term. As such, the second method values Macy's real estate holdings based on what they would be worth in today's market if they were fully leased under terms and conditions consistent with the local markets of each location. Utilizing the CoStar Market Pricing series, we derived an estimated value of $10.5 billion, an amount that equates to approximately $146 per square foot.
Though the ultimate value of the retailer's real estate lies somewhere in between the two scenarios, and the proceeds from the sale of any properties depend on numerous unknown factors, the value of Macy's real estate could be worth as much or more than the value of Macy's retail business.
The question now becomes whether management will be able to unlock that value for shareholders quickly enough to buy the storied retailer enough time to reinvent itself once again. Or if the question is left for new ownership to decide.