Hedge fund manager William Ackman is urging Target Corp. (Minneapolis) to sell the land underneath its stores to a new unit set up by the retailer specifically for the purpose of collecting rent from the stores. Under Ackman’s plan, which he insists is worth billions of dollars to Target, existing Target shareholders would gain stakes in the new real estate business. Ackman’s hedge fund, Pershing Square Capital Management LP (New York) owns nearly 10 percent of Target stock.
Target owns about 95 percent of its stores and roughly 85 percent of the land underneath them. By comparison, Macy’s Inc. (Cincinnati) owns 68 percent of its stores and Walmart Stores Inc. (Bentonville, Ark.) owns 63 percent.
Ackman said the land and the buildings that house Target stores had a replacement value of about $39 billion, but the stock market only values them at about $13 billion. The investor’s plan to extract that value involves creating two closely related companies: the retail operations, which would own the stores, and a real estate investment trust that would own the land. The REIT would lease the land back to Target for 75 years under one master lease that would be linked to the inflation rate. It would create the country’s largest real estate investment trust and the 62nd largest company in the S&P 500.
The retailer said the complicated proposal would hurt its credit rating and raise its cost of borrowing, perhaps undermining its ability to survive the economic downturn. And the company believes a sliced-and-diced Target would ultimately have less control over its stores.
However, Target and an outside adviser, Goldman Sachs, said they would evaluate Ackman’s proposals, as they have done others. Earlier this year, at Ackman’s suggestion, the retailer sold part of its credit card business to JPMorgan Chase for $3.6 billion.
Target, which operates 1684 stores, considers its real estate a significant asset that strengthens its balance sheet and financing options in difficult economic times.
Whether or not Target embraces Ackman’s proposal, he has already accomplished one goal: As the buzz about his plan has swept the investment community, Target’s shares have risen 25 percent, resulting in a roughly $600 million gain for Ackman’s hedge fund.