Monetizing Real Estate: A Fund Favorite at Delivering Alpha

Starboard Value, Sandell Asset Management and Corvex Management touted new activist strategies built on the land, not the business.


After pressure on Yahoo apparently contributed to CEO Marissa Mayer’s recent decision to spin off the company’s stake in Alibaba, observers of activist hedge fund manager Jeffrey Smith wondered what he and his firm, New York–based Starboard Value, would target next. He had taken on the once-looming web giant, restaurant conglomerate Darden Restaurants and fading office supply chain Office Depot in recent months, so when Smith took the stage at Institutional Investor and CNBC’s fifth annual Delivering Alpha conference Wednesday to present a new idea, it was anyone’s guess which industry might be next.

This time, it turns out, Starboard is getting into retail. Smith disclosed his firm’s new stake in Macy’s, which he believes is worth closer to $125 per share than the $66.73 it was trading for at the start of trading Wednesday. In the hours after Smith’s presentation, the stock rose nearly 8 percent, to $71.87. The Macy’s play may sound familiar to those who followed Smith’s foray into Staples, but this isn’t about turning around a trouble business. It’s about real estate.

According to Starboard’s calculations — and the valuations of an unnamed real estate advisory firm — about $21 billion of the company’s $29 billion enterprise value is attributable to its real estate, including its wholly owned flagship stores in New York and San Francisco, which are worth $4 billion and $1.5 billion, respectively. When rent and taxes are taken into consideration, the company’s operating business “is actually free,” said Smith. He believes the company can add $500 million in earnings before interest, taxes, depreciation and amortization, or about $10 per share. To capture that, Smith is once again calling for a spin-off.

“This is an opportunity to create two leading companies, Macy’s operating business and a real estate company, which can be accomplished while maintaining the dividend, and actually making it safer,” he argued.

Starboard isn’t the only activist hedge fund pushing the real estate strategy. Smith was the first of three managers to tout similar plays during a Delivering Alpha panel about new investment ideas. Thomas Sandell of New York–based Sandell Asset Management followed Smith’s Macy’s presentation with one about home furnishings company Ethan Allen Interiors, which Sandell argues has significant real estate potential and should be taken private and undergo its own opco-propco split. Ethan Allen stock spiked nearly 6 percent after Sandell’s presentation, reaching $31.54 per share before settling at $30.24.

By the time Keith Meister of Corvex Management presented his firm’s investment in American Realty Capital Properties, a real estate investment trust that he noted is a “huge beneficiary of companies looking to monetize real estate,” he joked that there wasn’t too much left for him to say about the trend. ARCP, however, may have been the most controversial of the three bets because of recent turmoil at the company, which was embroiled in litigation over alleged accounting irregularities and financial misinformation earlier this year and then subsequently experienced a major executive shake-up. In response to questions about recent events, Meister told the Delivering Alpha audience that “what was a liability will now be an asset,” referring to ARCP’s new board. “This was never a distressed asset,” he added. “It was just a distressed management team that got replaced.” ARCP stock gained 1.74 percent Wednesday.


All this talk about using real estate as a tool to finance balance sheets left some questioning whether a bubble might be building. Later in the day, CNBC’s David Faber, co-anchor of Squawk on the Street, asked Jonathan Gray, global head of real estate at Blackstone Group, whether things had gone too far. Gray seemed optimistic, however, saying the hedge funds’ interest in real estate was more likely a reflection of the maturation of shareholder activism. “Because of [the growth of activism], investors are looking for hidden value,” he said.

The day wasn’t all about real estate. Other highlights included Nelson Peltz, founder of Trian Partners, and Pershing Square Capital Management’s founder, Bill Ackman, discussing the benefits and limits of activism after sharing an onstage hug, and Esther Dyson, chair of EDventure Holdings, noting that many tech start-ups are creating products “for the 1 percent.”

CNBC Washington correspondent John Harwood also subjected Republican presidential candidate Ted Cruz to a spirited round of questioning, pressing him on everything from his defense of Donald Trump’s recent disparaging comments about Mexican immigrants to whether he considered the audience he was addressing to be a group of “crony capitalists.” Cruz emphasized his concerns about illegal immigration and his belief that both of the candidates seen as front-runners — Hillary Clinton and Jeb Bush — seem more focused on Wall Street than Main Street. The day ended with a heated debate about activism, high-yield debt and exchange-traded funds between Carl Icahn, chair of Icahn Enterprises, and Larry Fink, CEO of BlackRock, in which Icahn called BlackRock a “dangerous company” and Fink argued that ETFs “create more price transparency and liquidity than anything in the market.”