Bill Ackman Trying To Make REIT Move w/ Target (historical valuation comparables, cmbx-aaa index, commercial real estate price index)

Bill Ackman comes up with some interesting ideas and this time he's trying to unlock value at Target ($TGT). He manages the billion dollar hedge fund Pershing Square Capital Management (SEC filings) which owns close to 10% of the company. I embedded a video of him on Charlie Rose a few days ago here. He's trying to unlock the value of Target's illiquid real estate by spinning off <20% into a real estate investment trust (TIP REIT) at a discount. The plan would be to spin off the rest to shareholders at a later date. He believes Target would realize the real estate value by allowing this new entity to trade freely alongside REIT and "Big Box Ground Lease" EV/EBITDA multiples on the market. Which makes sense.



Also from his presentation he believes Target would realize higher free cash flows by a) shifting land capex to the REIT and b) writing off the after tax rent expense since Target would be paying rent to this newly formed entity. Which would save he believes about $888 million.




The revised transaction webcast w/ slides from 11/19/2008 can be found here. If that doesn't come up try here which has links to both of his webcasts and slide pdf files. Here is the revised transaction pdf file. Hopefully the links still work in the future.

It would be an interesting new high yield instrument with a very clean balance sheet. Plus he also points out that the REIT's dividend would rise with inflation or consumer price index (CPI). But if the full transaction went through would retail sales turn around in time to help out with the new rent (ebitda) payout? Look what happened to Mervyns!

1. Developers Diversified Realty and Macquarie DDR Trust Announce Acquisition of Mervyns Real Estate Portfolio,

2. Inland Western Announces Acquisition of 25 Mervyns Properties.

3. Macquarie DDR Trust - Mervyns announces restructure

4. Mervyns files for Chapter 11 bankruptcy

Ackman explained in the presentation that Target had enough EBITDAR coverage to withstand a big retail sales squeeze. Plus Target is obviously a better discount retailer than Mervyns. He also talked about selling off credit card receivables to raise even more cash to pay down debt. Their 53% ownership (other half owned by JP Morgan) of the receivables could yield a $4.4 Billion book value. Listen to his webcast and look at the presentation. So would Target be better off collecting income from risky, yet favorable spreads or raising cash to pay down debt? Plus the Fed is about to extend credit to consumers. Bill Ackman did say it could be tough for this type of transaction to take place during this market environment.

On the real estate side is now the right time to spin off their land? I'm wondering if Bill thinks commercial real estate values will continue to fall. What's interesting is spreads on AAA rated CMBS index derivatives spiked to 847 basis points the other day from 200 in October (Chart below). It was probably anticipating the Citigroup bankruptcy/bail out which did correct after the bailout news occurred, however since they are AAA rated securities w/ spreads up 500% since May 2008 you have to wonder if these tenants will see further distress (various readings 1, 2, 3, 4).

I also put up historical valuation comparables for Target and retail REITs. You can come up with two conclusions here. Either valuations to earnings are undervalued based on historical 5yr high/low comparables or they are forecasting stress going forward. It's a gamble but cmbs spreads plus falling commercial real estate prices could make the case for continued stress. Either way Target doesn't need to rely on real estate prices to survive, the idea is to give shareholders the ability to unlock illiquid real estate value.

I feel this would've been a great transaction in 2006-2007 when the Blackstone/Equity Office Properties deal went through. Just imagine the multiple Target could've had for its land. Here's a quote from Merrill's analysis on EOP. Note this was an office REIT not retail but still interesting that it fetched 19-20x EBITDA.

"In addition, Merrill Lynch calculated illustrative implied prices of our common shares by multiplying management’s projected earnings before interest, tax, depreciation, and amortization (“EBITDA”) for the year 2007 by a range of multiples from 19.0x to 20.0x. This range of multiples was chosen based upon total enterprise value to estimated 2007 EBITDA multiples as of January 23, 2007 for the selected comparable companies." SEC Filing p. 19

It's hard to tell where these values will be in 2009+. Look at the Moody's/Real Commercial Property Price Retail Index topping out in mid 2007. I also charted out an 18 year view of $TGT vs retail REITs which showed performance similarities.


TGT vs. REIT Historical Valuation Comparables (Source: Smartmoney.com)
Are lower multiples pricing in more ebitda or ffo pain ahead???



Comparing Long Term Market Price Movements (Source: Yahoo Finance)
$TGT and $REITs traded similarly over 18 yr period



National Retail Properties Price Index (Moody's/Mit.edu)More to go on downside??



CMBX-AAA (AAA-Commercial MBS Index, Source: Markit.com)Measured in spread like CDS contract, spiked



Target 2 Year Stock Price (Source: Stockcharts.com)


So here is Target's response to his idea. Full article "Target rejects Ackman Reit plan" can be found at ft.com.

"Target said the the proposals had been reviewed by its management and board, who had decided that Mr Ackman’s estimate of the potential value of the plan “is highly speculative and insufficient to merit pursuit of a transaction” given the potential risks and costs. “These concerns are heightened in the current economic environment,” it said in a statement. Target, which has been advised by Goldman Sachs, said it was still concerned about the validity of Pershing Square’s market valuation of Target and the proposed separate Reit, as well as the reduction in financial flexibility and the “frictional costs and operational risks” of executing the ideas." Full article at ft.com

Finally Ackman decided to hold off on this until 2009.

"Investor William Ackman, who heads Pershing Square, said in a statement that Pershing "respectfully disagrees" with Target's decision and will "pursue the matter in the new year, after the holiday season." Full AP article

So we'll see what happens with this. It will only work if the market agrees with Ackman's valuation. That's why Target isn't interested because it's very speculative.

Here's a link of interest on the Target/REIT story. "Target's next big sale: Real estate" (MSN Money). As always check out what's going on with $TGT at stocktwits.com.