As ecommerce platforms cut into margins, investors in brick-and-mortar retailers have turned their attention with increased scrutiny to property portfolios and the value stored therein. For example, Macy’s activist investor Starboard Value recently priced the iconic department store’s real estate portfolio at $20 billion—roughly 7x the $2.9 billion Hudson's Bay Company paid for Saks Fifth Avenue in 2013.
Here are four ways real estate factors into retail M&A:
As an asset class, real estate sits near the top of a company’s balance sheet. Although tangible, being a non-current asset means that real estate cannot be easily turned into cash. Rather, a property portfolio, per the leveraging of most asset classes, can serve as collateral for the acquirer to borrow against in order to secure financing for a deal. Or, on the other hand, the value of those holdings can help secure a better price for the target company.
Review of real estate holdings typically takes place early in the diligence process. As the data room is populated with details about facilities and other property holdings, developing a strategy for establishing an overall valuation of the target company that looks at real estate for synergies just as surely as other asset classes is essential. For an individual property, its net operating income is a key metric similar to EBITDA to consider as part of the valuation process.
Operations that can be housed under one roof are also identified early in the diligence process, with underperforming properties likely getting earmarked for sale. With an accurate assessment of those assets in hand, strategies for improving the use of the remaining portfolio can be developed. For the acquirer, that process can help determine whether the target is worth approaching with a formal offer.
In addition to the outright sale of certain properties, companies can also identify opportunities to lease back the sold-off space or bundle the holdings into a real estate investment trust (REIT), depending on the company’s business objectives and the need for liquidity up front or over the long term.