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Target (TGT) investors call for real estate sale

Today's Financial News - Posted November 3, 2008

The real estate market is rough and plenty of investors have been hurt by the downfall. But why are investors in companies like Target (NYSE:TGT) getting slammed by the real estate implosion?

By Andrew Snyder

Baltimore – (TFN): Should a retail chain be severely and directly impacted by the fall of the nation’s real estate market? Should retailers divert from their core strategic mission and invest directly in the nation’s real estate market? Those are the questions Target Corp. (NYSE:TGT) investors are asking the company today.

According to William Ackman, the boss at Pershing Square Capital Management, the answer in Target’s case is no. He is pushing the company’s management to spin off its nearly $20 billion in real estate holdings into an independent real-estate investment trust (REIT).

Sure, almost every retailer’s revenues will be negatively impacted by an economy that is slowing because homeowners can no longer use their houses as built-in ATM machines. But that is something retail investors must expect. What they may not expect is the value of their positions to drop because of fluctuations in the value of the land their stores are sitting on.

By unloading its land investments, Target is free to focus solely on its retail mission without the threat of fluctuations in the real estate market dramatically altering its earnings potential.

For example, shares of Target have dropped by nearly 50% in the last year. While it is impossible to accurately determine how much of that drop can be attributed to lower retail sales growth and how much can be blamed on the decline in its real estate holdings, we can be certain that the fall would be dramatically smaller without the burden of real estate losses.

But we must remember the real estate pendulum swings both ways. Right now, real estate prices are depressed and share price is down. When the momentum swings the other direction, Target shareholders would see their holdings appreciate at a higher rate thanks to real estate gains.

Even with this risk, Ackman is right. It is not Target’s responsibility to hedge against real estate fluctuations. All it does is distract the firm from its core goals. By selling off its holdings and leasing its properties, investors are given a much more pure revenue stream to analyze and predict.

After the spinoff, if investors want to remain invested in the land holdings, they can use their proceeds of the sale to invest directly in the newly created REIT.

When investing, it is extremely important to compare apples to apples and oranges to oranges. When a company’s balance sheet is compromised by non-strategic irregularities, it makes forecasting difficult and smart investing nearly impossible. It is impossible to tell what is an apple and what is an orange.

Keep a close eye on Target over the next few months. Share price jumped on the notion this morning and has since leveled off. If Ackman’s demands find momentum, share price will continue to climb.


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Posted by Andrew Snyder · Filed Under Real Estate 

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