Would a Target REIT Prove a Good High Yield Investment?

This Target (TGT) REIT idea is gaining traction as an activist investor is pushing for Target to change its structure significantly to free up cash flow and generate a REIT that would throw off some serious dividends.

This week, activist investor William Ackman of Pershing Square Capital unveiled his plan to have Target spin off the land it owns into a new, publicly traded REIT (real estate investment trust) to raise the company's stock price via various mechanisms. Ackman owns about 10% of Target's shares outstanding.

Here's how it would work:

• Target would pay the REIT about $1.4 billion a year under a 75-year lease.
• It would still own the actual buildings.
• Target's cash flow would improve significantly due to a change in tax liabilities, hence increasing earnings moving forward.
• Tax laws allow for a REIT to remain exempt from income taxes as long as it distributes 90% of its earnings to shareholders via dividends.
• Target would reduce its dividend to a nominal amount while providing a juicy yield from the REIT.
• Target owns the land under over a thousand stores.
• Ackman claims the deal would result in a very safe dividend on the REIT since it would hold the physical buildings as collateral and they'd be highly unlikely to default.
• The REIT would pay dividends twice per year on same day government announces CPI numbers, so dividend would essentially act as inflation protected instrument.

The outcome is theoretically a stronger Target with a now reduced dividend with improved cash flow and then a REIT with an above market yield for its given risk (unless investors quickly bid the shares up once enacted).

This certainly sounds like an interesting proposition, but the plan is not without criticism. The interview on CNBC I heard Thursday did not include dissenting voices, but the stock dropped 6% Thursday in an up market on the same day he was selling the plan. Analysts have not necessarily deemed the plan a resounding success. Contrary to Thursday's down move, Target has run up 25% in the past week versus a move of 10% for the S&P, but Ackman thinks there may be another 100% to go if his plan is enacted.

Comments

[MT7777777:]

You must be joking or on Pershing's payroll!
You missed all the negative aspects of this plan!!
Better do your homework...

2008 Oct 31 10:26 PM