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Dillard’s REIT Plan Finds Fans

Investors rush into retail stocks in search of hidden value.

Dillard's Store

The generally low-profile Dillard clan made their Little Rock, Ark., headquarters the center of the retail world for one fleeting moment Thursday.

The retailer is channeling activist William Ackman with its plan to house some of Dillard’s Inc.’s property in a real estate investment trust. As a result, shares of Dillard’s Inc. leapt 11.8 percent to $41.96 as investors licked their chops at the chance to get a separate look at the value of the company’s owned stores — about 241 of its 309 doors. The retailer is publicly held but controlled by the Dillard family and led by chief executive officer William Dillard 2nd.

Department stores typically don’t get credit from Wall Street for the value locked up in their real estate, and the possibility that more companies could put their stores into a separate subsidiary — and one that would get the sweet tax benefits of a REIT — lifted the retail sector.

The S&P Retail Index gained 1 percent, or 4.83 points, to 506.35 on a generally down day in the markets. Among the gainers were Sears Holdings Corp., up 5.2 percent to $75.90; J.C. Penney Co. Inc., 3.5 percent to $30.10; Macy’s Inc., 2.1 percent to $23.40, and Nordstrom Inc., 0.8 percent to $41.24.

“If the transaction were to be completed, significant attention will be placed on the value of retail real estate going forward,” said Michael Exstein, analyst at Credit Suisse.

As of last count, Sears owned 808 of its 3,921 stores, Macy’s owned 469 of 850, Penney’s owned 416 of 1,108 and Nordstrom owned 92 of 184.

Ackman — who now controls 16.5 percent of Penney’s — tried unsuccessfully to separate Target Corp. from its real estate in a 2008 pitch to shareholders. The complex plan would have spun off the land under Target stores into a REIT, letting the market separate the values of the retail business and the real estate.

Now Dillard’s is offering up a sort of live test, though the specifics are still fuzzy and the notoriously tight-lipped company is following its own timetable.

Bill Dreher Jr., an analyst at Deutsche Bank, raised his target price on Dillard’s stock to $52, noting the retail business is worth $9.50 a share while the REIT would garner $42.50. He said the company could borrow up to $2 billion against the REIT and that it would likely use this “enhanced liquidity” to continue to repurchase shares.

Deutsche Bank estimates Dillard’s owned real estate could be worth $2.3 billion to $3.3 billion, potentially more than the company’s $3.1 billion enterprise value — which takes into account the value of the shares outstanding, debt and cash on the books.

But not everybody is ready to believe that the future for department stores includes a fresh round of financial engineering.

Kenneth Stumphauzer, an analyst at Sterne Agee, said Dillard’s was a special case, in part because its stock is “horrifically undervalued” and because the firm has owned its stores for so long that their value is no longer truly represented on the books.

“I don’t know if you could say the same kind of logic applies to other companies,” Stumphauzer said.