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Shaky Ground

A novel proposal by Target investor, William Ackman, that the discount retailer sell the land underneath its big boxes and spin off the real estate into the United States's largest REIT has drawn mixed reviews.

Ackman who runs the New York City hedge fund Pershing Square Capital Management contends the separation of the stores' operations from the real estate would unleash billions of dollars and give the struggling retailer greater access to capital in the economic downturn.

Under Ackman's plan, which he laid out during a two-hour presentation to Wall Street on October 29, the new tax-free REIT, Target Inflation Protected REIT, would own the land and Target the stores, which the retailer would lease for 75-year terms. The long-term leases, he said, would offer stability akin to Treasury Inflation Protected Securities (TIPS).

Morningstar senior equity analyst Joel Bloomer described Ackman's plan as both “innovative” and “one-of-a-kind.” However, he has some concerns. Bloomer questioned Ackman's valuation and comparison of the Target Inflation Protected REIT to TIPS, which are backed by the U.S. government, and that Target's REIT is as safe.

“I don't think you can make that analogy,” says Bloomer.

He also challenged some of Ackman's assertions including the estimated $39 billion valuation for the land on which 85 percent of Target's 1,684 stores sit in the wake of the market downturn.

“As far as value creation I don't buy into the full argument,” says Bloomer. “The value he estimates for the land is too high…. He would have a very difficult time spinning it out at that value today.”

Ackman, who owns nearly 10 percent of Target stock, contends if Target were to adopt such a structure, the transaction would boost Target shares to $70 up from $40 within a year.

Retail consultant and investment banker Howard Davidowitz says Ackman's strategy to sell the real estate to drive up the share price is viable. He points to companies like Pier 1 and ShopKo that are in business today as a direct result of sale/leasebacks.

“There will be more of a focus on monetizing the real estate as an alternative to bank financing,” Davidowitz says. “The option of the capital markets is basically closed, you don't have the option to go to the public for money, so you're going to see real estate used as a way to generate capital.”

On the day before Ackman's presentation, the Minneapolis-based retailer acknowledged it had initially heard his proposal in May but had some serious concerns. Among them, the retailer worried about the effect of the proposal on its borrowing costs, liquidity and credit rating especially in a rapidly weakening economic environment, where consumers are tightening their purse strings.

After Ackman's presentation, Target declined to comment beyond a release issued that stated the retailer “will continue to evaluate the most recent assumptions and ideas provided by Pershing Square…and will provide an updated perspective, as appropriate, in the near future.”

There are so many moving parts, notes Bloomer. The one fixed variable is the reduced taxes. “That's the only certainty in this whole equation.”

TAGS: Investment
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