Macy’s is being targeted by activist investment firm Starboard Value, which is seeking two or more joint ventures to maximize shareholder value. Monetizing real estate assets is becoming more and more popular among retailers, usually through the formation of real estate investment trusts, so this is certainly not an unusual demand.

Macy’s worth $70 a share?

This morning Starboard released a presentation on its website in support of its request. The firm estimates that Macy’s can unlock $10 billion in value for its shareholders, reduce risk and improve its structure.

Further, the firm states that the department store chain’s stock will be worth $70 per share following the formation of the REIT. Shares of Macy’s jumped by as much as 2.54% to $36.80 per share in premarket trading this morning. The retailer said in a statement that it is reviewing the presentation that was sent by Starboard.

Starboard releases presentation

In the presentation, the activist firm said it estimates that Macy’s real estate assets are worth about $21 billion “and possibly far more,” which is more than the company’s current enterprise value.

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In fact, Starboard believes Macy’s has one of the department store space’s most valuable real estate portfolios.

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The real estate market remains near record highs, so Starboard believes this is the time to monetize those assets by separating them. It is seeking at least two joint ventures to “attract the appropriate partners who will pay the most for different types of assets.” If Macy’s decides to follow the plan, it will not only be able to retain control of its real estate properties but also continue to pay its current dividend, repurchase shares and pay down debt.

Starboard suggests JV structure for Macy’s

The firm suggests that the two joint ventures Macy’s could create may include one for “its iconic properties” and another for its mall locations. After the formation of those JVs, it suggests that the department store chain starts exploring alternatives for the other $4 billion in real estate, which includes the owned mall locations in “‘C’ locations, ground leased mall locations and owned distribution centers.

Through this structure, Macy’s could raise up to $8 billion in total debt through fundraising at its JVs, enabling the department store chain to pay down most or all of its debt at the parent company level. Any extra cash could enable Macy’s to invest in “higher growth opportunities for the OpCo or repurchase Macy’s shares,” said Starboard.

“In this illustration, we assume the JV takes on initial leverage of 5.8x net debt / EBITDA, or $6.9 billion, which enables Macy’s to repay debt at the parent-level in order to achieve a target leverage ratio of 3.5x Adjusted Debt / EBITDAR at the OpCo as if it were a standalone entity (i.e., before the benefit of distributions from the JV up to the parent),” Starboard’s presentation reads.

The reason for the 3.5x metric is because the firm believes the OpCo would be able to retain its current investment grade. The entity holding the iconic mall properties would hold about $6.8 billion worth of real estate assets, while the mall properties venture would hold about $9.7 billion in assets.

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If needed, the JVs could distribute Macy’s part of its cash flow back to the retailer.

Images in this article are from Starboard Value’s presentation.

Starboard Value’s full presentation below.