Beware of The Eddie Lampert/Richard Baker REIT Syndrome
Macy’s is not in the real estate business; it is in the business of satisfying consumers’ dreams as one of the largest retail brands in the world. If Macy’s reduces one iota of focus on doing just that, they do so at their own risk. Therefore, it should not fall for the dubious pitch reportedly being made by some greedy hedge funds that Macy’s should form a REIT (real estate investment trust), an entity to which it could sell many of its valuable real estate assets and then lease the space back to the stores currently sitting on the space. In this creative financing scheme, the REIT profits as Macy’s cost of doing business increases.
Like other types of activist investors, the hedge funds, which recently acquired a stake in Macy’s, believe they can make a ton of money if Macy’s goes the REIT route. They envision increasing cash flow, thus boosting the stock price. Financial wizard and master of all shell games, “fast buck” Eddie Lampert (CEO of Sears Holdings Corp.) calls it by another, more sophisticated name: unlocking value. Real estate mogul Richard Baker, Governor and Chairman of HBC (Hudson’s Bay Co., parent of Saks Inc. and Lord & Taylor), may have his own spin on the name in the real estate vernacular. Baker has formed two REIT joint ventures, and indeed the stock price has risen significantly as a result of investors’ favorable view of the move.
But, hey, let’s call it like it is. Unlocking value through a REIT is just another way to squeeze cash out of a business and into the pockets of greedy, primarily short-term investors, most of whom don’t know, or even care about the real business mission of the companies they are trying to profit from.
As publicly vociferous as Mr. Lampert was about his intentions to turn Sears and Kmart around, it was obvious from day one that he had no idea how to do that. This led many experts to believe that his true unspoken strategy was exactly what he did, and continues to implement. In my opinion, he developed a financial strategy that would slowly and methodically manage the combined Sears/Kmart businesses (some $50 billion in 2004 when he acquired the brands), down and out. While doing so, he would “unlock the value” of assets such as real estate and brands, using various financial instruments (like the REIT), all configured to generate cash, the majority of which would end up in his pocket. For more details on these concepts, take a look at our past articles on Eddie Lampert.
To give “fast buck” Eddie the benefit of the doubt, even if his original intent was NOT to take those brands down while filling his pockets, it quickly became very clear that he had no clue about how to operate a retail business. So, maybe it was at that point that he reverted to his financial prowess and configured his various cash generating machines.
And while Richard Baker is no Eddie Lampert, he’s equally as brilliant in the real estate game as Eddie is in finance. Baker assigned a seasoned retail CEO, Jerry Storch, to run the retail businesses, which ostensibly signals the importance he places on growing the retail business as his main event — so to speak. However, “His Mogulness,” Mr. Baker, continues to see the valuations of his real estate assets climb into the stratosphere. He acquired all of Saks Inc. in 2013 for $2.9 billion, and the property occupied by Saks 5th Avenue in New York was valued at $3.7 billion in 2014. Where will his focus and interest end up, particularly as the retail game gets tougher and tougher?
Macy’s REIT Would Be Different?
Mr. Lampert and Mr. Baker were not just hedge fund activists. They acquired Kmart, Sears and the Bay, Saks and L&T outright. Macy’s should still be wary of the activists reportedly urging them to form a REIT. Macy’s should also understand the not so obvious potential parallel with how Lampert’s scenario has played out, as well as the question I raise regarding Baker’s future focus, and what that might result in.
And I believe “focus” is the operative word here. As I said in opening, “If Macy’s reduces one iota of focus on (satisfying consumers’ dreams as one of the largest retail brands in the world), they do so at their own risk.” If, and/or when, the value of the real estate begins to outpace the retail business, and the collective attention of Macy’s management and shareholders begins to shift in that direction, it will be the beginning of the end.
I was pleased to read in a “Business Insider” article last week that, “Macy\’s management believes that pursuing a sale-leaseback strategy in which it would sell its retail space and then rent it back would burden it with significant lease expenses that would erode its profitability and weaken its finances, according to three of the sources.”
Further, they quoted a Macy spokesman: \”We look at all of our stores so we can get the best economic and operational equation in each location. We analyze each store\’s situation and are always looking to maximize the value of the company.\” And, I hope when they say “value of the company” they are referring to their value as a retailer, not a realtor.
The Only Asset That Counts
Macy’s has only one asset that matters: its customers. And their customers don’t give a hoot about Macy’s other assets. All they care about is having their dreams satisfied every single time they connect with Macy’s. So talk about really unlocking asset value, Macy’s is well advised to focus 24/7 on unlocking more value out of their single most important asset.
By focusing on their customers, they will increase revenues and profits, reduce costs, and at the end of the day, will do more to increase shareholder value than any of the financial gimmicks activist investors can conjure up. And, by the way, I read that over the past seven years under the leadership of CEO Terry Lundgren, shares have increased 280%. That’s not chopped liver. It was a result of intense focus on the brand’s core business: satisfying dreams.
So, stick to your knitting Macy’s.