Dillard's Inc. shares rocketed 9.3 percent Thursday after an activist hedge fund suggested the Little Rock retailer should spin off some of its assets into a real estate investment trust.
Marcato Capital Management LP released a report encouraging Dillard's to create a stand-alone real estate investment trust, commonly known as a REIT. Such a move would increase the value of the combined companies to about $193 a share, the report said. Marcato said it owns a 4.9 percent stake in Dillard's.
"While the Company has utilized its capital efficiently to repurchase a substantial percentage of its outstanding shares, we believe there is more that can be done to create substantial long-term shareholder value," Marcato said in a statement.
The company added, "We encourage Dillard's board and management to actively explore this opportunity to the extent it is not presently doing so."
A spokesman for Dillard's declined to comment. In 2011, the company formed a subsidiary that operates as a real estate investment trust and transferred certain properties to the new entity, according to an annual report to shareholders.
Dillard's shares rose $10.28 to $121.04 on the New York Stock Exchange after Marcato's statement. The shares traded at more than six times average volume.
The shares have priced between $82.75 and $125.17 in the past 52-weeks. So far this year, the department store's stock is up 24.5 percent.
Marcato's presentation outlining the opportunities for Dillard's comes a day after Caesars Entertainment Corp. proposed restructuring into a real estate investment trust in a regulatory filing.
Sears Holdings Corp. also said earlier this month that it is considering selling and leasing back between 200 and 300 stores to a new investment trust. And Windstream Holdings Inc. of Little Rock said this year it plans to spin off some of its copper and fiber networks into a real estate investment trust.
"In recent months, several major corporations with significant real estate ownership have announced their intentions to explore the separation of these assets into stand-alone companies that would qualify for treatment as a real estate investment trusts ("REIT")," Marcato wrote. "We believe that Dillard's could unlock tremendous value were it to pursue such a transition."
Real estate investment trusts are traditionally comprised of income producing property such as shopping malls, apartments and office buildings. The trusts operate tax-free and pay the majority of their earnings to shareholders via dividends.
"Real estate investment trusts are kind of a bond equivalent," said Patty Edwards, managing director of investments at US Bank. "They are nice, safe solid money."
By turning real estate assets into a trust, retailers are able to get more value for their property, analysts said.
"What they are trying to do is unlock the value of the undervalued assets," said Bob Williams, senior vice president and managing director of Delta Trust Investments Inc. in Little Rock. Companies considering real estate investment trusts "have substantial real estate holdings," he said.
Business on 11/21/2014