By Jed Chew
Like many of my fellow college students, I don’t really shop at Macy’s. I’ve just never found the experience of shopping there compelling enough to make me return consistently.
But I still head to the Macy’s in Philadelphia’s Center City to watch the Thanksgiving Parade and Christmas Light Show every year. I return to Macy’s not just because of its iconic holiday traditions, but also because it’s conveniently located in the heart of the city.
Therein lies the dilemma for Macy’s. Many of its stores struggle with sales, but the real estate they sit out remains immensely profitable. This real estate value has thus been the impetus for a recent $5.8 billion investor buyout bid for Macy’s.
In this piece, I aim to take a deep-dive into Macy’s real estate holdings to explore the drivers behind the buyout bid. By focusing specifically on Macy’s, I also hope for this piece to serve as a follow-up to my previous piece, Rediscovering Retail, where I explored the macro- and micro-economic drivers that have led leading institutional players to change their outlook on the retail sector.
Background of Macy’s Buyout Bid
On December 1, 2023, Arkhouse Management and Brigade Capital Management submitted a $5.8 billion take-private bid for Macy’s.
While the offer price of $21 a share was around a 30% premium to Macy’s share price at that time (and is still at a premium at the time of writing this post), it was lower than Macy’s 52-week high and a mere fraction of its 2015 stock price.
Macy’s Stock Price (Source: Yahoo Finance)
Arkhouse is a hedge fund that typically focuses on real-estate investments. Its website specifically states that it “takes a private equity approach to its public market investing and employs selective shareholder engagement strategies to unlock unrealized equity value caused by the mispricing of real estate assets in the public market.”
It is thus unsurprising that the proposed buyout led to headlines such as “Macy's Billion-Dollar Question: What's More Valuable, Real Estate or the Business?” and “In Potential Deal to Take Macy’s Private, It’s All About the Real Estate.”
Valuing Macy’s Real Estate Footprint
According to the Wall Street Journal, Macy’s currently operates nearly 800 stores, which includes 500 stores under its namesake banner and the remaining under Bloomingdale’s (a higher-end department-store chain) or BlueMercury (a beauty chain).
Based on Macy’s own 2023 annual report, it owns 316 of its stores as well as another 102 stores where it owns the buildings but leases the land. Notably, these owned properties are mortgage-free, leading various analysts to estimate the value of Macy’s real estate at between $5 billion and $7 billion.
Macy’s flagship Herald Square store (Source: Newsweek)
In the past, Macy’s has fended off similar real estate-centric buyout bids from activist investors by selling off certain flagship locations.
Retail Dive has reported that Macy’s previously sold its San Francisco men’s store for $250 million, its Minneapolis flagship for $59 million, and a portion of its Chicago Loop flagship for $27 million.
Macy’s has also announced plans to partner with real estate firms on well-located stores to realize their potential asset value, such as building an office tower above its flagship Herald Square store in New York City.
While the value of Macy’s real estate alone may make the proposed $5.8 billion buyout price seem like a discount, it is worth noting that some of Macy’s store locations could have deed restrictions which could render redevelopment challenging and time-consuming.
Another concern is that Macy’s extensive real estate footprint was itself the product of a previous wave of distress. Between 1980 and 2000, Macy’s became the dominant department store by absorbing failing independent stores. While Macy’s owns some top-performing assets such as its Herald Square flagship, it has also retained many aging stores with subpar sales.
Like many other national chains such as Bath & Body Works and Foot Locker, Macy’s has also been trying to pivot away from traditional enclosed mall anchors to open-air strip centers. This strategy has partly been driven by e-commerce, with sales and shipping data enabling chains to identify potential locations that are closer to their target customers.
Since 2016, Macy’s has shuttered almost 170 of its mall anchor stores. At the same time, Macy’s has also embarked on an off-mall expansion, opening new “Market by Macy’s” and “Bloomie’s” stores that are one-fifth of its typical anchor store footprint.
However, the bulk of Macy’s nearly 800 stores still remain in enclosed malls. Questions abound about whether the real estate value of these stores lie in finding new anchor tenants or converting the retail space to other uses (e.g. multifamily) entirely.
Previous Retail Buyout Bids
The buyout bid for Macy’s that was submitted just last month is not an isolated deal. In fact, there have previously been two notable but ultimately unsuccessful real estate plays by private equity investors involving Sears and Toys ‘R’ Us.
Sears x Seritage Growth Properties REIT
In 2018, Sears entered bankruptcy with nearly 700 stores. Many of these real estate assets were spun into the Seritage Growth Properties REIT. (Note: The IRS has since tightened regulations governing REITS to block a C-corp from spinning off its real estate into a REIT).
According to Seritage’s website, its mission is to “maximize value for shareholders by repositioning the Company’s portfolio through leasing, redevelopment, formation of strategic partnerships, and other bespoke solutions.”
Initially, Seritage aimed to unload around 50 of these stores to generate cash to redevelop the remaining sites and realize their value. However, as its REIT share price more than halved from 2021 to 2022, Seritage attempted to sell its remaining assets by retaining Barclays to find a buyer, but did not receive a single offer.
Toys ‘R’ Us x KKR & Vornado Realty Trust
Toys ‘R’ Us was another iconic American chain that entered bankruptcy in 2018. Like Sears, it struggled to maintain its relevance in the face of growing competition from big box retailers as well as Amazon.
“Toys ‘R’ Us was trying to win on convenience and price, but it wasn’t convenient and the prices weren’t so great.”
Toys ‘R’ Us was a unique case because it had actually been the subject of a $6.6 billion leveraged buyout in 2005 led by Bain Capital, KKR, and Vornado Realty Trust.
Given that these three firms are all prominent in the real estate industry (WUREC has organized multiple treks to these firms as well), many industry observers assumed that the LBO was both an attempt to improve store performance and liquidate real estate assets.
However, these PE giants were unable to turn things around due to significant debt and strong competition, and eventually threw in the towel in 2018. In fact, as early as 2016, Vornado’s annual report already stated that they “carry our … investment at zero.”
Despite Toys ‘R’ Us owning nearly 800 stores across the United States, there were few buyers interested in its real estate because of the widespread perception that
there had already been an oversupply of retail space; and
brick-and-mortar storefronts were less valuable as consumers and retailers alike increasingly relied on e-commerce.
But as I highlighted in my previous piece, Rediscovering Retail, both of these perceptions have largely changed among many real estate investors. Arkhouse and Brigade’s unsolicited bid for Macy’s suggests that they too are increasingly optimistic about the resurgence of the retail sector.
The Road Ahead for Macy’s in 2024
The latest update that was just released by Macy’s today (January 21, 2024) states that “Arkhouse and Brigade failed to provide evidence of a viable financing plan and unsolicited proposal lacks compelling value.”
Consequently, Macy’s Board of Directors has decided not to “enter into a non-disclosure agreement or provide any due diligence information to Arkhouse and Brigade.”
At the same time, Macy’s just announced a few days ago that it plans to cut 3.5% of its workforce (around 2,350 staff) and close 5 of its anchor stores across California, Florida, Hawaii, and Virginia.
As incoming Macy’s CEO Tony Spring prepares to take over in February 2024, he will have to grapple with how to realize value for many of Macy’s disgruntled shareholders.
While the unsolicited buyout bid from Arkhouse and Brigade has been rejected, it will unlikely be the last if Macy’s retail business continues to struggle.