Dillard’s Shares Spike Nearly 10% Amidst REIT Spin Off Talk

Shares of Dillard’s Inc. jumped nearly 10% in heavy trading Thursday (Nov. 20) after San Francisco-based Marcato Capital Management released a presentation outlining opportunities “for significantly increasing shareholder value” at the Little Rock department store chain.

In a news release issued during midday trading, Marcato Managing Partner Mick McGuire outlined a hypothetical plan that his investment firm “sees for significantly increasing shareholder value at Dillard’s” by spinning off the company’s sprawling department store assets across the U.S. into a REIT, or 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 real estate investment trusts,” McGuire argued in the news release. “We believe that Dillard’s could unlock tremendous value were it to pursue such a transaction.”

McGuire said his firm, which owns a 4.9% stake in the Arkansas department store retailer, decided to make the case for creating another Dillard’s-affiliated publicly traded company because it wanted to highlight “the value of Dillard’s underlying real estate assets and the compelling case for the creation of a stand-alone REIT.”

“We believe executing on this plan would value the companies at a combined $193 per share, representing a 75% increase from current prices,” McGuire stated. “We encourage Dillard’s board and management to actively explore this opportunity to the extent it is not presently doing so.”

Marcato’s passive appeal to Dillard’s comes at a time when REIT’s are gaining popularity as an alternative investment vehicle and corporate growth strategy. Most REIT’s are similar to mutual funds in that money is pooled and invested. The Internal Revenue Service requires that REITs invest at least 75% of assets in real estate and distribute at least 90% of taxable income to shareholders.

According to the recent report by Ernst and Young, “Global Perspectives: 2014 REIT,” real estate investment trust IPO volume continues to grow in 2014 with $6.8 billion raised globally in the first half of 2014, following record IPO levels for the alternative investment vehicle in 2013.

In the U.S., the nontraditional REIT market has almost quadrupled by market cap from $40 billion in 2011 to $152 billion today, the Ernst and Young report said. The number of listed equity REITs in the U.S. is 177, excluding private or mortgage REITs, and 34 of these are non-traditional REITs.

In late July, Little Rock-based Windstream Corp. announced that it planned to spin off part of its assets to create a new publicly traded REIT that would own Windstream’s existing fiber and copper network and other fixed assets.

The move is expected to reduce Windstream’s debt, increase its cash flow, and potentially position the company for acquisitions. Windstream said it anticipates that the spinoff would occur in the first quarter of 2015.

Similarly, McGuire argued that Dillard’s could unlock additional shareholder value by spinning off its real estate assets. He also commended the company’s management and board for their executive strategy and diligence in recent years.

“Dillard’s has improved its inventory assortment and gross margins, reduced excess SG&A and unproductive advertising expenses, and closed underperforming stores,” McGuire said. “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.”

Dillard’s shares rose more than 12% before settling at $121.04 in Thursday’s trading session, up $10.28 or 9.3%. More than 4.4 million shares of Dillard’s stock traded hands today, nearly eight times the normal volume.

Since early 2009, Dillard’s stock has skyrocketed from a low of $3.55 per share to a $121.04 at the end of trading today, a whopping 3,309% percent increase. To put that in perspective, a Dillard’s stockholder owning 1,000 shares would have made nearly $120,000 on an initial $3,500 investment.

Still, Dillard’s did not respond today to the Marcato’s presentation. The Wall Street Journal, Bloomberg and Reuters all reported on Marcato’s appeal to Dillard’s, but the Little Rock retailer did not respond to those stories as is its long-standing custom.