Should Target Have a REIT Spin Off?

William Ackman, a 10% shareholder of the discounter, thinks so. The head of Pershing Square Capital Management is proposing that Target spin off its company-owned stores and land into an Inflation-Protected REIT.

Its real estate would then enter a 75-year triple-net-lease-deal for the stores. Ackman says TIP REIT, as he calls it, would be the largest of its kind, with its $27.5-billion market value eclipsing Simon Property Group’s $20.8 billion.

“This is a great business, a great retailer and a great management team,” Ackman said. “I’d much rather own the land under Target than some of the paper issued by the US government. TIP REIT will have better and cheaper access to capital than any other retailer and any REIT.”

The last time we reported on the website-less Pershing (C’mon y’all, get a site! You can afford it!) was when the firm invested $42.5 million into Borders. There was speculation then that Ackman would try to acquire the bookseller. That hasn’t happened.

So will he have better luck with this proposal? Does it make sense? Should other retailers consider such a structure?

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16 Responses to “Should Target Have a REIT Spin Off?”


  1. 1 kin powell October 30, 2008 at 9:23 am

    no the REIT would be useful as a growth vehicle forstore growth, which they have well in hand or to retturn someny to shareholders, which not planned or to transfer debt which is not planned– just another Ackman plan for planning’s sake!

  2. 2 kps October 30, 2008 at 10:00 am

    It is not clear what Target will do with the money it gets from the spin-off…current consumer fundamentals cannot be countered with more money in the balance sheet. If Target can show a clear growth/expansion plan in today’s environent, then it may make sense, otherwise it could go the way of Mervyn.

  3. 3 BillyGoat October 30, 2008 at 11:45 am

    Someone please explain, “Why is an Inflation Protected Reit desirable and what exactly is it?”

  4. 4 James October 30, 2008 at 12:36 pm

    In my opinion, overtime this structure will cause the two businesses to go their seperate ways, such lease arrangements tend to float to “market” so the deal terms will in the long run favor the REIT. The REIT assets will be subject to real estate market variables(managed to highest and best use theory)that may prove adverse to Target’s best interest and of course Target’s business performance will have a huge effect on the REIT’s assets and its performance.
    If I was a Target shareholder I would want the real estate on its books and the assets in a sense protected by Target’s performance even though the value of those assets may be less than would be realized by a present sale to the REIT. Once you step off this bridge there is no going back, and overtime this will reduce Target’s value and the flexibility it has now with its real estate.
    If I was a REIT investor I would want to know where we’ll be in the event trouble besets Target. Big boxes have a dismal track record when it comes time to re-lease them. The empty box actually constitutes a blight, a very negative perception difficult to overcome.

  5. 5 James October 30, 2008 at 12:57 pm

    Billy,
    To be “inflation protected” the lease rate achieved from Target will have to be inflation adjusted on some scheduled basis. I would bet that at present they don’t charge themselves escalating rents but prefer to enjoy the discount!

  6. 6 JSuess October 30, 2008 at 1:28 pm

    “Spin” is the right word to use when describing what is being proposed. This is a criminally bad idea for the long term profitability of Target. Healthy individual stores that are owned by the company typically become more profitable with time as they amortize the cost of the building and site improvements.

    Typically a store pays an effective ‘internal rent’ to the parent company in an amount that amortizes the cost of construction over 20-years. Effectively, the company provides the store a mortgage on the building and site improvements. At the end of 20-years, the store’s rent goes down substantially to an ‘internal rent’ based on the original value paid for the land. Unless the proposed REIT reduces the rent after the first 20-years to an amount based only on the value of land, the individual store will end up paying for itself 3.75 times over 75-years.

    Now add insult to injury by making this a triple-net-lease. Not only would the store pay a higher rent for 55 more years, but it would also continue to be responsible for the cost of repairs and remodels. Talk about getting nothing for your money. The effective of this deal structure is that the store’s rent goes up and stays up when it should be going down after 20-years.

    The worst part of this deal for Target is the proposed length of these leases. Target is going to close stores. What do you think the REIT is going to charge Target to terminate the lease of a closed store? The net present value of a 75-year lease is too great a liability to contemplate.

  7. 7 Dan October 31, 2008 at 9:14 am

    There is not enough information provided in this article to reach a valid conclusion. I would assume that Target would remain the primary shareholder and Manager of the REIT, allowing it to remain in control of both the terms and the rates. It appears to me that he is simply suggesting to move the assets from one bucket to another. REITs typically have the ability to access international capital more efficiently than Target would be capable of doing due to the advantageous tax treatments of REITs. This is likely merely a way to access capital and liquidity in a time when banks aren’t lending. Keep in mind, there are many REIT structures and many unique methods by which to utilize REITs.

  8. 8 greendiamond October 31, 2008 at 9:20 am

    Sell the real estate and grow the Target brand. The leasehold agreements will be written with enough options which favor the tenant, Target, and the REIT will be attractive to a pool of investors because of the locations, brand name and creditworthiness. Both sides win.

  9. 9 JSuess October 31, 2008 at 12:25 pm

    The REIT would need to allow the leases to amortize like mortgages in order for the rent to be reduced after 20-years. I’ve never heard of a REIT that you can invest $1 in today and expect to get something less back after 20-years.

    Unless the basis of the lease payments is reduced after 20-years, much of Target’s profits on older stores will go to the REIT. Giving up profits for the remaining 55-years of the lease and beyond so the company can grow today is about the dumbest thing I’ve ever heard.

  10. 10 MrPotter October 31, 2008 at 1:50 pm

    It is only just that the owner of an asset enjoys the benefit of the real increase of the asset, but also bears the brunt of the decline of the asset. A renter is merely a renter.

  11. 11 bill grene November 3, 2008 at 6:25 pm

    A spin off usually means the part of the business being spun off is distributed (for free) like a dividend to the existing stockholders. Thus, in Target’s case, existing shareholdres would end up holding two stocks–one in the REIT and one in the retail Business-Target. Consequently they have not lost anything but have gained diversification. If they hold onto both securities over the long run the transfer pricing between the two entities will not help or hurt the stockholder–since he will be sharing in both. The key element here that gets my attention is that Target apparently OWNS the real estate under most of its stores. That is a hidden plus for buying its stock since many retailers simply rent space and do not gain the long term appreciation of such assets. Whether they spin it off or not it is a clear signal the management has been prudent and looking long-term.

  12. 12 Russell November 3, 2008 at 6:57 pm

    Selling the family silver seems like a good idea on only the day you’re holding the check. Once the one-time bump is gone, you’re left with nothing but negatives for life. A few quarters of benefit and a life of handicap. Does Ackman have any other ideas how to screw up one of the few well-run, nationally competative retailers in America?

  13. 13 AP November 4, 2008 at 11:32 am

    Can you say “Mervyn”. This is exactly the tactic you woould expect from an equity fund; spin off the RE and let the Operating Company hang out to dry.

    Proceed With Caution

  14. 14 Artem April 29, 2009 at 8:12 am

    Интернет магазин хотей. Доставка по Киеву. Электроника, мобильные телефоны, бытовая техника
    Гаджеты, mp3 плееры, флеш накопители, Ноутбуки, и много другое.

  15. 15 Billy Bob April 29, 2009 at 1:01 pm

    -89 2387 443 +_+_ ###@ ^&! **%.

  16. 16 R2D2 April 29, 2009 at 1:07 pm

    Alpha, Beta, Gamma, Delta, Epsilon …. Omega.


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