Macy's real estate alone is worth nearly $3 billion more than investors' bid, these analysts say

By Joy Wiltermuth

$5.8 billion bid for Macy's comes despite largely frozen commercial real-estate market

A group of investors wants Macy's Inc. for the holidays - at a steep discount.

Arkhouse Management and Brigade Capital Management recently submitted a $5.8 billion bid to acquire the shares of Macy's (M) that they don't already own for $21 a share, the Wall Street Journal reported on Sunday, citing people familiar with the matter.

JPMorgan equity researchers, however, on Monday said they think Macy's real estate, itself, is likely worth almost $3 billion more than the offer, pegging its real-estate holdings at about $8.5 billion.

Macy's owns about 320 of its 784 stores, including its flagship Herald Square building in New York City, which was built in 1902. JPMorgan said its thinks the flagship is worth at least $3 billion itself.

"What it means is that we've at least found someone willing to attempt to establish value in the marketplace," said Rich Traub, a partner in the real-estate practice of Chicago law firm Smith, Gambrell & Russell, with a focus on transactions in the retail sector.

Traub described 2023 as a year of deeply depressed transaction volumes, when sellers and buyers mostly were left "staring each other in the face," but unwilling to transact.

"They are going to start out conservatively," Traub said of investors bidding for Macy's. "But it's a step in the right direction for transactions."

Borrowing costs that nearly doubled from the pandemic lows have kept commercial property deals on ice, but so has a lack of clarity on clearing prices.

Coming into 2023, an estimated $3.2 trillion in commercial real-estate assets had been sold over 11 quarters when the yield on the 10-year Treasury was lower than 2%, according to MSCI Research.

Volatility in benchmark rates used as a peg for loans, and the broader economy this year hasn't helped either. The 10-year Treasury yield BX:TMUBMUSD10Y in October briefly shot up to a 16-year high of 5%, but in November quickly shed about 75 basis points.

Retail properties in 2023 subject to new appraisals saw an average 21% reduction, while office buildings and multifamily properties fell by about 34%, according to BofA Global analysts.

In a weekly client note, they said it "remains a decent probability of further adjustment in property values before markets can confidently signal a new 'equilibrium.'"

Arkhouse and Brigade Capital declined to comment. Macy's didn't respond to a request seeking its own valuation of its real-estate portfolio.

Macy's and many other big department stores have spent much of the past decade slashing their footprints in struggling malls across the U.S., to focus on more profitable locations.

Shares of Macy's were lower Tuesday, while the three major equity indexes SPX DJIA COMP were attempting to set another round of fresh highs for the year. Shares of Macy's closed 19.4% higher on Monday, at $20.77, the biggest daily increase in more than two years, according to Dow Jones Market Data.

See: Macy's bonds rally with stock after investor group reportedly offers to take company private

-Ciara Linnane contributed

-Joy Wiltermuth

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12-12-23 1038ET

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