At the beginning of 2019, executives at Macy's (NYSE:M) warned investors that the company's asset sale activity would begin to normalize this year. Whereas Macy's has averaged more than $500 million in annual cash proceeds from real estate sales over its past three fiscal years, the company expects asset sale gains of roughly $100 million in fiscal 2019. (Cash proceeds may differ somewhat from the book gains reported, depending on the timing of payments and the book value of properties sold.)

However, while the pace of asset sales may be slowing, Macy's isn't done rationalizing its real estate footprint. The proceeds from asset sales in 2019 and beyond will be a key contributor to the company's cash flow, allowing the retailer to potentially resume its share buyback program later this year while continuing to reduce its debt.

A solid start to the year

It reported asset sale gains of $43 million for the first quarter of fiscal 2019, putting it nearly halfway to its full-year goal. Cash proceeds came in somewhat lower at $34 million.

The exterior of the Macy's Herald Square flagship store

Macy's is steadily extracting value from its vast real estate portfolio. Image source: Macy's.

In the first half of the second quarter, Macy's has completed two more asset sales. Earlier this month, local media reported that Macy's had sold its store in White Plains, N.Y., to the mall owner (Pacific Retail Capital Partners) for $27 million.

The retailer said it will lease back its store and continue to operate normally, but there's a good chance that this is only a temporary situation. Macy's has a more successful store 10 miles away in Yonkers and several other stores within 15 miles of White Plains. Furthermore, the Galleria mall in White Plains really needs to be redeveloped. Sooner or later, this Macy's store is likely to close to make way for a major redevelopment project.

Also this month, Macy's sold its ground lease for the Medinah Temple building in Chicago for a reported $25 million. This building currently houses a Bloomingdale's Home store, which will move back into the main Bloomingdale's store (a half-mile away) in mid-2020. The Medinah Temple building will then be redeveloped.

Between Q1 asset sales and these two deals, Macy's may already be closing in on its $100 million goal -- and it's not done yet.

The entrance to the Macy's Backstage at the Galleria at White Plains

Macy's recently sold its White Plains store to the mall owner for $27 million. Image source: author.

Plenty of deals are in the pipeline

Macy's is already working on several other potential real estate sales. For example, last fall, the company confirmed that it was investigating closing its store in Boulder, Colorado, to make way for a redevelopment of that building into 150,000 square feet of office space.

Furthermore, Brookfield Asset Management is moving ahead with plans to develop excess land owned by Macy's (primarily several dozen store parking lots). Former Macy's CFO Karen Hoguet stated in early 2018 that if the company chooses to cash out -- it also has the option to hold on to a joint-venture interest in the new developments -- it could receive $50 million just for the first nine parcels.

Aside from these asset sales that are known to be under consideration, Macy's may also sell and close a small number of full-line stores as part of its usual end-of-year evaluation process. The net result is that Macy's could easily exceed its $100 million target for asset sale gains this year.

Other real estate initiatives may not show up as real estate gains

Some of the most valuable real estate optimization work that Macy's is doing won't lead to asset sale gains -- at least not immediately. First, the company recently confirmed that it is seeking zoning approvals to build a 1.2-million-square-foot office tower on top of its Manhattan flagship store. When completed, this would provide a new source of rental income -- assuming Macy's maintains a stake in the office tower rather than just selling the land and air rights -- while also driving more traffic to the flagship store.

Additionally, two years ago, Macy's announced a project to carve out 10,000 square feet of space in the front of its San Francisco flagship store, facing Union Square. The company hopes to rent this space to luxury brands, bringing in millions of dollars in rent annually. The renovations are nearly complete, and the new retail space is now on the market.

Despite positive sales trends, roughly stable profitability, and a massive trove of real estate, the company's shares continue to trade for just seven times forward earnings. That makes the stock a great bargain, particularly if Macy's will soon be ready to start returning more cash to shareholders.