How retailers are spinning real estate assets into investing gold

Canadians have had a front-row seat to the alchemy involved in turning retailers’ real estate assets into investing gold. Empire Co. Ltd., the parent company of Sobeys, and Canadian Tire Corp. were among the first chains to stoke their share prices by spinning off store properties into publicly traded real estate investment trusts (REITs). This past winter, Hudson’s Bay Co. governor Richard Baker concluded two big deals to spin off U.S. and Canadian real estate and raise more than $1 billion in cash.

It’s now a motif for investors in retailers: Capture the swollen value of properties by selling them, then lease back the stores. Among the U.S. chains that have done it recently are Sears Holdings Corp., Bon-Ton Stores Inc. and Darden Restaurants Inc., owner of the Olive Garden.

Here, however, is a tip for investors intrigued by the idea: Be careful. It’s hard to separate the value of the buildings from the value of the business of selling stuff.

Macy’s is a fine example. The company has 885 stores and it owns about 575 of them. This past summer, analysts at the investment firm Cowen & Co. estimated that Macy’s properties were worth about $19 billion on an enterprise value basis, which includes the equity and debt in those holdings. (All currency in U.S. dollars.) They pegged the enterprise value of the entire company at about $30 billion. Flowing those numbers through to Macy’s common shares, the analysts concluded that there was a potential upside of 24% in the share price.

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