M - Macy's

[FCharlie]

Will someone please help me understand Macy's debt repurchases?

 

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

 

Here's a press release for reference:

 

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

 

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

 

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

 

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

 

 

[bizaro86]

Will someone please help me understand Macy's debt repurchases?

 

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

 

Here's a press release for reference:

 

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

 

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

 

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

 

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

 

Could there be tax motivations?

[Spekulatius]

Will someone please help me understand Macy's debt repurchases?

 

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

 

Here's a press release for reference:

 

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

 

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

 

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

 

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

 

Could there be tax motivations?

 

I am thinking the optics are better if you get rid of high coupon debt. The loss on extinguishing the debt is a one off and tend to get ignored and then you have years of saving high coupon payments, which make subsequent earnings look better. There is also a tax advantage of taking a loss upfront.

[Mephistopheles]

Anyone looking at this? Bought some around $20-21 and then as it dropped this week. Earnings imo weren't too bad today, annual guidance lowered by $.20, gross margin guidance down 160bps or so. Yet the stock got annihilated.

 

Today, the equity is worth about $5 billion and net debt is $4 billion. The flagship properties (Herald Sq, Union Sq, State St) I think can easily fetch like $4 billion or so. That leaves like $5 billion for the rest of the properties and the business. To me this looks like it's selling for liquidation value...yet it is FCF positive.

[Parsad]

Anyone looking at this? Bought some around $20-21 and then as it dropped this week. Earnings imo weren't too bad today, annual guidance lowered by $.20, gross margin guidance down 160bps or so. Yet the stock got annihilated.

 

Today, the equity is worth about $5 billion and net debt is $4 billion. The flagship properties (Herald Sq, Union Sq, State St) I think can easily fetch like $4 billion or so. That leaves like $5 billion for the rest of the properties and the business. To me this looks like it's selling for liquidation value...yet it is FCF positive.

 

Herald Square alone is $4B...they can also build an 80 story tower above Herald Square if they wanted. 

 

We bought a ton of Macy's around $19 nearly two years ago, saw it go back up to $39, but we were waiting for long-term gains to kick in before selling.  It started dropping about 2 months before long-term gains would have kicked in, and has kept falling till today.

 

When we bought it just under two years ago it had $6B in net debt, $1.4M CF, P/E of 6, 7.5% dividend yield, real estate worth about $12-15B conservatively.

 

Today, is has $4B in net debt, $1.3M CF, P/E of 5, 9.2% dividend yield, real estate still worth $12-15B conservatively.

 

All you have to do is a Sears/Seritage split here, and you unlock $30-40 per share in real estate value with the retail business trading at another $10-12.  Because they would be paying close to market rent, the retail business would trade at only 4-5 times CF after increased rent expense.  But you free up the  extremely valuable real estate which will go up in value, and let the retail business fight or die. 

 

Cheers!

[Mephistopheles]

Anyone looking at this? Bought some around $20-21 and then as it dropped this week. Earnings imo weren't too bad today, annual guidance lowered by $.20, gross margin guidance down 160bps or so. Yet the stock got annihilated.

 

Today, the equity is worth about $5 billion and net debt is $4 billion. The flagship properties (Herald Sq, Union Sq, State St) I think can easily fetch like $4 billion or so. That leaves like $5 billion for the rest of the properties and the business. To me this looks like it's selling for liquidation value...yet it is FCF positive.

 

Herald Square alone is $4B...they can also build an 80 story tower above Herald Square if they wanted. 

 

We bought a ton of Macy's around $19 nearly two years ago, saw it go back up to $39, but we were waiting for long-term gains to kick in before selling.  It started dropping about 2 months before long-term gains would have kicked in, and has kept falling till today.

 

When we bought it just under two years ago it had $6B in net debt, $1.4M CF, P/E of 6, 7.5% dividend yield, real estate worth about $12-15B conservatively.

 

Today, is has $4B in net debt, $1.3M CF, P/E of 5, 9.2% dividend yield, real estate still worth $12-15B conservatively.

 

All you have to do is a Sears/Seritage split here, and you unlock $30-40 per share in real estate value with the retail business trading at another $10-12.  Because they would be paying close to market rent, the retail business would trade at only 4-5 times CF after increased rent expense.  But you free up the  extremely valuable real estate which will go up in value, and let the retail business fight or die. 

 

Cheers!

 

Yea, agreed with everything. I'm also thinking that a sale lease back is the best thing for the company. How do you estimate the RE value at $12-15 b? The only base I have for valuation is Starboard's presentation from a few years ago which estimates it at $21 billion, which I agree is not nearly that high now. I try to be conservative so I just count the trophy properties for now. I feel a lot of the B and C properties are worthless...

 

Re Herald square, $4 billion might be a bit high. I'm using Lord and Taylors WeWork transaction as a comp which was $850 million for 676,000 square feet. If we use the same ratio for Herald Square's 2.1 million feet, I get $2.7 billion. Yes they can build a tower over the site but that would take quite a bit of capex too and not sure what it's really worth.

[BG2008]

Have you guys been to New York lately?  They can't give away retail space on Madison Ave away and it used to command $1,000 a square foot in rent. 

[Spekulatius]

If you like real estate, just buy real estate. you can buy it at 40% discount to NAV - MAC, TCO, VNO, SLG....no need to mess around with retail.

[Gregmal]

If you like real estate, just buy real estate. you can buy it at 40% discount to NAV - MAC, TCO, VNO, SLG....no need to mess around with retail.

 

Which is funny, because O, NNN, ADC, STOR, etc; almost entirely consisting of retail, trade at substantial PREMIUMS to NAV...Weird world we live in.

 

EDIT: I'd also point out the disparity between traditional office, which is getting a garbage valuation as Spek mentioned, and then Wework or the like...crazy.

[Mephistopheles]

If you like real estate, just buy real estate. you can buy it at 40% discount to NAV - MAC, TCO, VNO, SLG....no need to mess around with retail.

 

I've looked at both MAC and TCO, own tiny amounts. I don't like the high debt load. In contrast, Macy's management has done a great job consistently reducing debt, and they've got quite a ways to go.

[BG2008]

Just some thought on the retail/real estate combo.  When you own a retailer that has a lot of real estate, you are simultaneously a landlord to ONE SINGLE tenant and the tenant itself. So you're a landlord with extremely concentrated single tenant risk.  There are no publicly traded REIT that have close to that level of concentration.  As your operation deterioates, your tenant credit risk also spikes.  I own enough warehouses to be aware of what Amazon and other e-commerce folks are doing to increase the density of their distribution network.  I would bet that the competitor's moat is increasing every  day.  Yet Macy's can't afford to invest in Omnichannel capabilities.  There is a bit of a death spiral involved in that as people go to malls/retail stores less, the cashflow drops, the company engages in cost cutting which means that customer service deteriorates.  It becomes a vicious cycle at the same when your competitors are widening their moat with 2 day delivery going to 1 day and further going to 2 hours.  Good luck gentleman, I hope you don't need it.  But you likely will.   

[SHDL]

Also the new tariffs are obviously a big deal for these guys (and similar retailers) given their thin margins and apparent lack of pricing power.  Note that their potential impact is not reflected in the revised guidance that they just put out.

[TwoCitiesCapital]

Will someone please help me understand Macy's debt repurchases?

 

The company has been tendering for their debt for years. They have also been buying in the open market. They continue to choose high coupon debt that trades above par instead of buying longer dated debt that trades below par.

 

Here's a press release for reference:

 

http://investors.macysinc.com/phoenix.zhtml?c=84477&p=irol-newsArticle&ID=2380456

 

For example. Macy's is offering 110 cents on the dollar for 6.65% bonds that mature in 2024.  Meanwhile, they have 4.3% bonds that mature in 2043 that trade for 73 cents on the dollar as well as 5.125% bonds that mature in 2042 that trade for 82.7 cents on the dollar.

 

Obviously the ones they are buying have a higher coupon, but they end up taking a loss on the repurchase, which lowers book value. Alternatively, if they chose to buy the 2042 & 2043 bonds, they would be able to buy significantly more of them simply because of their lower price. The yields are similar, and they would eliminate more of their future obligation with the same amount of dollars, which would increase their book value.

 

There has to be a reason why they continue to do this. They did a similar tender a year ago as well. I just can't for the life of me understand why they would choose to pay $1,100 to eliminate $1,000 of debt when they can pay $730 to eliminate $1,000 of debt.

 

If they're concerned about the mid-term outlook, this would be a way to get rid of near-term debt that would need to be rolled at the wrong time.

 

It's not an opportunistic reduction of debt at favorable prices. It's a disciplined approach to pushing out and reducing near term maturities and increasing cash flows.

 

Also, honestly, the IRR of buying 20+ year debt at a 20% discount isn't that great. They'd be better off buying shares to reducie dividend payments.

 

[Spekulatius]

In wonder what the profit from their own line business looks like. They have no edge there.

 

They have a strategy to invest in the best 50 stores and maybe a 100 more - but they have a total 680 stores. What will happen to them? Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too? The real estate in the other stores may not be worth much, after expenses to close them are accounted for.

 

Maybe it is now the time to make a bold move. Keep Bloomingdales and a few flagship stores, close the rest. It’s not an easy decision to make for management. If they make a big mistake they are toast. FWIW, I do agree that paying down the near term maturities is the right move. Cutting th dividend may be another one and eventually will happen, imo.

[Mephistopheles]

 

Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too?

 

Well they can just do a sale leaseback. Leave the retail side to fend on it's own. As long as the top 50/150 stores pay market rent all is good.

 

Seritage did a good job in unlocking value and SHLD was infinitely worse than Macy's as a retailer. A seritage like transaction done today as a spinoff would unlock tremendous value. The top 150 stores are performing well mid single digit comps I think, so I don't see those properties selling for much less than current EV. Even if you assume everything else is worth zero.  Meanwhile they continue to knock down debt year after year making it even more compelling

[Foreign Tuffett]

 

Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too?

 

Well they can just do a sale leaseback. Leave the retail side to fend on it's own. As long as the top 50/150 stores pay market rent all is good.

 

Seritage did a good job in unlocking value and SHLD was infinitely worse than Macy's as a retailer. A seritage like transaction done today as a spinoff would unlock tremendous value. The top 150 stores are performing well mid single digit comps I think, so I don't see those properties selling for much less than current EV. Even if you assume everything else is worth zero.  Meanwhile they continue to knock down debt year after year making it even more compelling

 

How are you defining "did a good job unlocking value" ?

 

I think a SHLD holder who participated in the rights offering and continued to hold SHLD and SRG is worse off than if they had sold SHLD after rights offering was announced.

[Mephistopheles]

 

Also, doesn’t the strategy to invest in the best 50/150 stores encumber the best real estate too?

 

Well they can just do a sale leaseback. Leave the retail side to fend on it's own. As long as the top 50/150 stores pay market rent all is good.

 

Seritage did a good job in unlocking value and SHLD was infinitely worse than Macy's as a retailer. A seritage like transaction done today as a spinoff would unlock tremendous value. The top 150 stores are performing well mid single digit comps I think, so I don't see those properties selling for much less than current EV. Even if you assume everything else is worth zero.  Meanwhile they continue to knock down debt year after year making it even more compelling

 

How are you defining "did a good job unlocking value" ?

 

I think a SHLD holder who participated in the rights offering and continued to hold SHLD and SRG is worse off than if they had sold SHLD after rights offering was announced.

 

Meaning they could have sold the shld portion and kept srg. I'm happy with Macy's but if the retail and RE were to separate, I think it would be valued higher than current price.

[Mephistopheles]

Just some thought on the retail/real estate combo.  When you own a retailer that has a lot of real estate, you are simultaneously a landlord to ONE SINGLE tenant and the tenant itself. So you're a landlord with extremely concentrated single tenant risk.  There are no publicly traded REIT that have close to that level of concentration.  As your operation deterioates, your tenant credit risk also spikes.  I own enough warehouses to be aware of what Amazon and other e-commerce folks are doing to increase the density of their distribution network.  I would bet that the competitor's moat is increasing every  day.  Yet Macy's can't afford to invest in Omnichannel capabilities.  There is a bit of a death spiral involved in that as people go to malls/retail stores less, the cashflow drops, the company engages in cost cutting which means that customer service deteriorates.  It becomes a vicious cycle at the same when your competitors are widening their moat with 2 day delivery going to 1 day and further going to 2 hours.  Good luck gentleman, I hope you don't need it.  But you likely will.   

 

I highly respect your opinions on this message board, so it isn't easy for me to debate this issue with you.

 

I'm glad you mentioned warehouses. Macy's happens to own 16.5 million square feet of distribution/warehouse space. What is your take on its valuation?

 

I'm looking at this recent Blackstone acquistion of 179 million sq feet of warehouse space for $18.7 billion, which comes out to over $100/sqft. Using this same multiple, the Macy's space is worth $1.6 billion.

 

I briefly looked at M's real estate holdings, which totals 71.7 million square feet of owned space outright. This doesn't include the 21.5 million square feet of ground leased property. Excluding Herald Square and SF, it is 69.2 million feet of space. How much is this worth? I simply took Seritage's EV of $3.5 billion divided by its RE space of 32.7 million sq feet for which I get an EV of $107/sq ft. Apply this to M's 69.2 million sq feet and we get $7.4 billion RE value.

 

Add Herald Square at $1,250/sqft is $2.7 billion and Union Square at $1,000/sqft is $335 million, together for $3 Billion additional RE value.

 

So I add the warehouses of $1.6 + Retail RE $7.4 + Herald/Union Sq of $3 billion and I get a $12 billion value for its real estate alone, not including ground lease value.

 

It also excludes retail, credit card operations as well as Blue Mercury (which I think is a gem).

 

The stock today closed for an EV of $8.5 billion.

 

Those are my thoughts. Brick and mortar is apparently dead but Seritage keeps chugging along, this past quarter they signed another 700k sqft for $20/ft.

[BG2008]

Just some thought on the retail/real estate combo.  When you own a retailer that has a lot of real estate, you are simultaneously a landlord to ONE SINGLE tenant and the tenant itself. So you're a landlord with extremely concentrated single tenant risk.  There are no publicly traded REIT that have close to that level of concentration.  As your operation deterioates, your tenant credit risk also spikes.  I own enough warehouses to be aware of what Amazon and other e-commerce folks are doing to increase the density of their distribution network.  I would bet that the competitor's moat is increasing every  day.  Yet Macy's can't afford to invest in Omnichannel capabilities.  There is a bit of a death spiral involved in that as people go to malls/retail stores less, the cashflow drops, the company engages in cost cutting which means that customer service deteriorates.  It becomes a vicious cycle at the same when your competitors are widening their moat with 2 day delivery going to 1 day and further going to 2 hours.  Good luck gentleman, I hope you don't need it.  But you likely will.   

 

I highly respect your opinions on this message board, so it isn't easy for me to debate this issue with you.

 

I'm glad you mentioned warehouses. Macy's happens to own 16.5 million square feet of distribution/warehouse space. What is your take on its valuation?

 

I'm looking at this recent Blackstone acquistion of 179 million sq feet of warehouse space for $18.7 billion, which comes out to over $100/sqft. Using this same multiple, the Macy's space is worth $1.6 billion.

 

I briefly looked at M's real estate holdings, which totals 71.7 million square feet of owned space outright. This doesn't include the 21.5 million square feet of ground leased property. Excluding Herald Square and SF, it is 69.2 million feet of space. How much is this worth? I simply took Seritage's EV of $3.5 billion divided by its RE space of 32.7 million sq feet for which I get an EV of $107/sq ft. Apply this to M's 69.2 million sq feet and we get $7.4 billion RE value.

 

Add Herald Square at $1,250/sqft is $2.7 billion and Union Square at $1,000/sqft is $335 million, together for $3 Billion additional RE value.

 

So I add the warehouses of $1.6 + Retail RE $7.4 + Herald/Union Sq of $3 billion and I get a $12 billion value for its real estate alone, not including ground lease value.

 

It also excludes retail, credit card operations as well as Blue Mercury (which I think is a gem).

 

The stock today closed for an EV of $8.5 billion.

 

Those are my thoughts. Brick and mortar is apparently dead but Seritage keeps chugging along, this past quarter they signed another 700k sqft for $20/ft.

 

I used to look at Macy's and some of the other OpCo/PropCo the same way.  I was wrong in the past and I'll do my best to explain why I think the valuation metric you lay out is flawed.  It took me some pain and real capital loss before I realize my mistake.  The problem with your approach is that you are assuming the following:

 

1) The real estate is free and clear and can be readily sold or sale/leaseback to a buyer as of today

2) That the OpCo and PropCo can exist independently and somehow if you sold Herald Square, Macy's can somehow retain its retail operation and a RE buyer can somehow magically develop the Herald Square building.  It doesn't work like that.  Macy's will either lose the $200mm of EBITDAR (Rumored back in 2016) associated with the Herald Square RE or the buyer will have to assume the Macy's tenant risk. 

3) Now apply these dynamics to hundreds of locations and what you have is an issue that I call "tug boats vs tankers" 

 

What I used to fail to see is that these OpCo Propco issues are a mix of "melting ices" and "real estate development that demands 15-20% IRR"  If Macy's was Kohl's or a Dollar General and growing SSS, it is very easy.  You can simply do entirely sale leasebacks.  The drag on proceeds will simply be the capital gains taxes.  Because Macy's OpCo is a melting ice cube, there is no natural buyer for their properties with Macy's as a tenant.  Naturally, you need an operation like a Seritage to act as a "re-leasing" agent.  So Macy's is a tanker going in one direction with no expertise in real estate disposition or development.  Seritage and Howard Hughes is a tanker going in an opposite direction where they have a pipeline and culture and a process of executing on real estate development.  Talk to Seritage or HHC and see what they have laid out 5-10 years and you will see that there is a focus and a team of talented staff who is analyzing each property and trying to figure out a way to develop those assets.  So you're taking a blanket comparison and saying "Seritage owns this many sqft and Macy's owns this many sqft and they are apples to apples."  It is really an apple to orange comparison.  RE developers need a 15-20% levered IRR on their projects.  So you really should think that to unwind and re-position the RE, you need 15% IRR to dislodge the RE, find a buyer, and reposition the property.  I doubt that Macy's has a team like Seritgage and HHC.  Watching HHC develop their pipeline is like watching paint dry, albeit a profitable process.  But it is still an incredibly slow pace relative to other form of investing.  They are some of the most competent developers that I have come across and yet the process of getting zoning approval, putting the shovel in the ground, and putting up a building takes forever.  Look at how long the Seaport project in NYC has taken. 

 

Another way of looking at this is let's say you want to own a bunch of Macy's warehouse because you believe in the long term need for good warehouses.  So you can either buy 16 million sqft leased to 100 tenants with no single tenant taking up more than 3% of your footprint.  Or you can buy a 16 million sqft portfolio entirely leased to Macy's.  You can't take that Blackstone transaction and say that the Macy's portfolio will be worth exactly the same.  Warehouses today require a certain clear height, number of truck bays, etc.  I have no idea what Macy's warehouses look like.  But I doubt that they are considered Class A.  I think $50-60/sqft is likely that right price for Macy's portfolio which translate into a $1 billion value.  This is probably the only asset that could potentially appreciate in the long run. 

 

Now let's go back to talking about the retail assets. 

[BG2008]

Retail real estate is a tough sell.  That's not news.  One of the risk that people don't mention is people's perception after a recession.  I watched in amazement in how suburban office lost its value after the great recession.  Powerful trends emerge after an economic event.  It became very clear that urban multi-family are highly desirable and suburban office buildings are very undesirable.  The guys who own suburban offices often lost their buildings due to a vicious cycle of declining rent and lack of capital to fund TI and LC.  It is already looking tough for retail real estate.  I do see some green shoots in certain online only concepts getting into brick and mortar locations because ultimately they acknowledge that you do need physical locations for customers to try out products, Warby Parker, Mattress retailing, etc.  Nonetheless, I track what Amazon is doing and everyday, Amazon's moat keeps getting wider.  So we go through a recession and it is 2-3 years from now and Amazon had another 2-3 years to get further ahead.  I can see what happened to Sears happen to Macy's where lower sales results in the need to cut staff and inventory.  When a customer shows up and wants to buy, there is no one to help them transact.  This is not a sales drops by 1% and EBITDA drops by 1.5% business.  This is a sales drop by 1% and EBITDA drops by 5% type of business.  It can spiral out of control very quickly.  My wife recently ordered an espresso machine from Macy's.  We waited for 3 weeks and then finally got a notice that the product can't be fulfilled.  I wind up getting the product from Amazon and got our machine within 2 days and we are making delicious Latte at home. 

 

Look at SL Green and where they are trading at.  Now tell me who will buy Herald Square?  Let's say someone does decide to buy Herald Square.  Does Macy's move out?  Well that's $200mm of EBITDAR a year.  There is no retailer in NYC who is killing it.  There are spaces sitting empty on Madison Ave where they used to charge $900/sqft of rent.  It is scary out there and for good reasons.  This isn't CNBC proclaiming the "end of equities"  This is real and structural.

 

Is there a price. Probably.  But I am trying to evolve to buying higher quality companies.  It's not easy and you don't get to buy stuff at mid single digits FCF.  But I like owning stuff that will organically grow at low to mid single digits for the next 10 years.  If I am going to own businesses that will shrink over time, I want the shrink pattern to be 1% sales decline that result in 1-2% EBITDA decreases.  This is in my too hard pile.  Why lose sleep over Macy's when I can own Griffin Industrial Realty at $35/share with the NAV at $70 and that NAV is growing.  The portfolio is free and clear and could be taken over at a large premium on any given day.  I don't want to sweat out the survival of Macy's when I can join the evil empire that is Amazon and enjoy some tail wind at 50% of NAV and compounding at 12-13% a year before assigning any value to the narrowing of price/value gap.       

[BG2008]

Buffet owned a department store in Baltimore that was pretty much a net-net and owned its real estate.  He got out of it without making a profit.  I should have paid more attention to that fact back when I was involved with Macy's. 

[Mephistopheles]

 

 

 

 

I used to look at Macy's and some of the other OpCo/PropCo the same way.  I was wrong in the past and I'll do my best to explain why I think the valuation metric you lay out is flawed.  It took me some pain and real capital loss before I realize my mistake.  The problem with your approach is that you are assuming the following:

 

1) The real estate is free and clear and can be readily sold or sale/leaseback to a buyer as of today

2) That the OpCo and PropCo can exist independently and somehow if you sold Herald Square, Macy's can somehow retain its retail operation and a RE buyer can somehow magically develop the Herald Square building.  It doesn't work like that.  Macy's will either lose the $200mm of EBITDAR (Rumored back in 2016) associated with the Herald Square RE or the buyer will have to assume the Macy's tenant risk. 

3) Now apply these dynamics to hundreds of locations and what you have is an issue that I call "tug boats vs tankers" 

 

What I used to fail to see is that these OpCo Propco issues are a mix of "melting ices" and "real estate development that demands 15-20% IRR"  If Macy's was Kohl's or a Dollar General and growing SSS, it is very easy.  You can simply do entirely sale leasebacks.  The drag on proceeds will simply be the capital gains taxes.  Because Macy's OpCo is a melting ice cube, there is no natural buyer for their properties with Macy's as a tenant.  Naturally, you need an operation like a Seritage to act as a "re-leasing" agent.  So Macy's is a tanker going in one direction with no expertise in real estate disposition or development.  Seritage and Howard Hughes is a tanker going in an opposite direction where they have a pipeline and culture and a process of executing on real estate development.  Talk to Seritage or HHC and see what they have laid out 5-10 years and you will see that there is a focus and a team of talented staff who is analyzing each property and trying to figure out a way to develop those assets.  So you're taking a blanket comparison and saying "Seritage owns this many sqft and Macy's owns this many sqft and they are apples to apples."  It is really an apple to orange comparison.  RE developers need a 15-20% levered IRR on their projects.  So you really should think that to unwind and re-position the RE, you need 15% IRR to dislodge the RE, find a buyer, and reposition the property.  I doubt that Macy's has a team like Seritgage and HHC.  Watching HHC develop their pipeline is like watching paint dry, albeit a profitable process.  But it is still an incredibly slow pace relative to other form of investing.  They are some of the most competent developers that I have come across and yet the process of getting zoning approval, putting the shovel in the ground, and putting up a building takes forever.  Look at how long the Seaport project in NYC has taken. 

 

Another way of looking at this is let's say you want to own a bunch of Macy's warehouse because you believe in the long term need for good warehouses.  So you can either buy 16 million sqft leased to 100 tenants with no single tenant taking up more than 3% of your footprint.  Or you can buy a 16 million sqft portfolio entirely leased to Macy's.  You can't take that Blackstone transaction and say that the Macy's portfolio will be worth exactly the same.  Warehouses today require a certain clear height, number of truck bays, etc.  I have no idea what Macy's warehouses look like.  But I doubt that they are considered Class A.  I think $50-60/sqft is likely that right price for Macy's portfolio which translate into a $1 billion value.  This is probably the only asset that could potentially appreciate in the long run. 

 

Now let's go back to talking about the retail assets. 

 

Hi BG2008, thanks for your detailed response. Regarding the SRG comparison. Yes, the culture at SRG is exclusively focused on RE development. But the fact is that Macy's does have an active partnership with Brookfield Properties as well as a SVP focused on the real estate, and a RE guy on the board. They are selling assets and densifying the space. On the other hand SRG has nearly 50% of unleased space as of last quarter.

 

They don't need to sell Herald square, I hope they don't. I think it's important to differentiate between the good stores and bad stores. 50% of brick and mortar sales occur at 150 locations. These are the locations where the company is focusing resources. I can't find data on the comps at these locations, but their online business is growing at double digits. They need to aggressively focus on downsizing the bottom 500 or so locations. Maybe reduce square footage to support the internet business? Current store count is 101 less than it was at the beginning of 2016, from 737 to 636.

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business? Hard to say now but they are performing quite well. Maybe going forward they won't perform. But it is up to management at that point to act responsibly. They can start burning a billion dollars year after year like SHLD and destroy all of that value or they can do the right thing. I do like that they are paying down debt every single quarter. I wouldn't mind a dividend cut to 0 to be honest, buy back more debt and then some shares.

 

Let's see what happens. If I'm wrong I'll be the first to admit it.

[BG2008]

 

 

 

 

I used to look at Macy's and some of the other OpCo/PropCo the same way.  I was wrong in the past and I'll do my best to explain why I think the valuation metric you lay out is flawed.  It took me some pain and real capital loss before I realize my mistake.  The problem with your approach is that you are assuming the following:

 

1) The real estate is free and clear and can be readily sold or sale/leaseback to a buyer as of today

2) That the OpCo and PropCo can exist independently and somehow if you sold Herald Square, Macy's can somehow retain its retail operation and a RE buyer can somehow magically develop the Herald Square building.  It doesn't work like that.  Macy's will either lose the $200mm of EBITDAR (Rumored back in 2016) associated with the Herald Square RE or the buyer will have to assume the Macy's tenant risk. 

3) Now apply these dynamics to hundreds of locations and what you have is an issue that I call "tug boats vs tankers" 

 

What I used to fail to see is that these OpCo Propco issues are a mix of "melting ices" and "real estate development that demands 15-20% IRR"  If Macy's was Kohl's or a Dollar General and growing SSS, it is very easy.  You can simply do entirely sale leasebacks.  The drag on proceeds will simply be the capital gains taxes.  Because Macy's OpCo is a melting ice cube, there is no natural buyer for their properties with Macy's as a tenant.  Naturally, you need an operation like a Seritage to act as a "re-leasing" agent.  So Macy's is a tanker going in one direction with no expertise in real estate disposition or development.  Seritage and Howard Hughes is a tanker going in an opposite direction where they have a pipeline and culture and a process of executing on real estate development.  Talk to Seritage or HHC and see what they have laid out 5-10 years and you will see that there is a focus and a team of talented staff who is analyzing each property and trying to figure out a way to develop those assets.  So you're taking a blanket comparison and saying "Seritage owns this many sqft and Macy's owns this many sqft and they are apples to apples."  It is really an apple to orange comparison.  RE developers need a 15-20% levered IRR on their projects.  So you really should think that to unwind and re-position the RE, you need 15% IRR to dislodge the RE, find a buyer, and reposition the property.  I doubt that Macy's has a team like Seritgage and HHC.  Watching HHC develop their pipeline is like watching paint dry, albeit a profitable process.  But it is still an incredibly slow pace relative to other form of investing.  They are some of the most competent developers that I have come across and yet the process of getting zoning approval, putting the shovel in the ground, and putting up a building takes forever.  Look at how long the Seaport project in NYC has taken. 

 

Another way of looking at this is let's say you want to own a bunch of Macy's warehouse because you believe in the long term need for good warehouses.  So you can either buy 16 million sqft leased to 100 tenants with no single tenant taking up more than 3% of your footprint.  Or you can buy a 16 million sqft portfolio entirely leased to Macy's.  You can't take that Blackstone transaction and say that the Macy's portfolio will be worth exactly the same.  Warehouses today require a certain clear height, number of truck bays, etc.  I have no idea what Macy's warehouses look like.  But I doubt that they are considered Class A.  I think $50-60/sqft is likely that right price for Macy's portfolio which translate into a $1 billion value.  This is probably the only asset that could potentially appreciate in the long run. 

 

Now let's go back to talking about the retail assets. 

 

Hi BG2008, thanks for your detailed response. Regarding the SRG comparison. Yes, the culture at SRG is exclusively focused on RE development. But the fact is that Macy's does have an active partnership with Brookfield Properties as well as a SVP focused on the real estate, and a RE guy on the board. They are selling assets and densifying the space. On the other hand SRG has nearly 50% of unleased space as of last quarter.

 

They don't need to sell Herald square, I hope they don't. I think it's important to differentiate between the good stores and bad stores. 50% of brick and mortar sales occur at 150 locations. These are the locations where the company is focusing resources. I can't find data on the comps at these locations, but their online business is growing at double digits. They need to aggressively focus on downsizing the bottom 500 or so locations. Maybe reduce square footage to support the internet business? Current store count is 101 less than it was at the beginning of 2016, from 737 to 636.

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business? Hard to say now but they are performing quite well. Maybe going forward they won't perform. But it is up to management at that point to act responsibly. They can start burning a billion dollars year after year like SHLD and destroy all of that value or they can do the right thing. I do like that they are paying down debt every single quarter. I wouldn't mind a dividend cut to 0 to be honest, buy back more debt and then some shares.

 

Let's see what happens. If I'm wrong I'll be the first to admit it.

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan. 

 

 

 

[Mephistopheles]

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

 

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

 

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

 

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

[TwoCitiesCapital]

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

 

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

 

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

 

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

 

But that's his point though - right? The high-end RE value is captive as it won't be sold/developed to unlock that potential because those are primarily the locations where the store is doing well and cash flow positive.

 

The low-end stores don't make much money, but typically means they won't be sold for much either as others will struggle where Macy's has.

 

Without a repurposing vehicle like SRG to help rework the properties to a higher use, the real estate isn't worth much. And the value that it does have is a melting ice cube if used to prop up the retail operations as was done at Sears.

 

This is why this didn't work for JCP or for Sears. I'm not saying Macy's stock won't go up from here, but if it does it won't be because of the RE value IMO.