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Should Macy’s Follow Sears’ Lead and Set Up a REIT?

Are Macy’s best days behind it? Jeffrey Smith, co-founder and CEO of activist investment firm Starboard Value, seems to think so.

At the Delivering Alpha conference in New York on Wednesday, Smith said the 157-year-old retailer owns $21 billion worth of real estate—not the $7.8 billion value carried on Macy’s books—that it should spin off into a separate operating company or form a joint venture in order to improve its share price by more than 70 percent. He estimated that Macy’s flagship Herald Square location in New York alone is worth about $4 billion, and put stores in Chicago and San Francisco at about $1 billion each.

According to Smith, a real-estate investment trust (REIT) sale-leaseback transaction in addition to other improvements could value the company’s stock at $125. Macy’s shares climbed 7.9% after his announcement, their biggest percentage gain since November 2013, but experts are skeptical that unlocking brick-and-mortar value is the answer to the retailer’s woes.

“The fundamental question for every enterprise is: ‘What business are you in?’ A corporate real estate business is entirely a different business model than a retail business—and requires entirely different talent,” Chris Peterson, president of Integrated Marketing Solutions, said in an online discussion among RetailWire’s BrainTrust panel of industry insiders on Thursday. “What happens if the REIT spinoff has very good talent and raises the rents to a level that jeopardizes Macy’s profits?”

Retail consultant Mark Heckman agreed. “You can only make that move once and even though the cash flow and investor benefits can be rewarding in the short term, you are separating a very valuable leverage point from the retail operation,” he said.

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Earlier this year Sears Holdings Corp. sold around 235 Sears and Kmart branded properties to a REIT it set up, called Seritage Growth Properties, and then leased back all but 11 of them. Sears said it expected to raise about $2.5 billion from the transaction, but many analysts are predicting the REIT will buy the 129-year-old retailer little more than time.

As retail relationship marketer Cathy Hotka put it, “This is a typical Wall Street approach—focus on the next quarter, rather than the next decade.”

Sears isn’t the only company making real-estate moves. Hudson’s Bay—parent of Saks Inc. and Lord & Taylor—formed a joint venture with Simon Property Group for about 42 locations valued at $1.8 billion, and department store retailer Bon-Ton announced in June that it would sell six stores to a REIT and lease them back in a deal valued at $84 million.