Dillard's to Lease Back Store Portfolio to Newly Formed REIT

Chicago Breaking News / Dow Jones Newswires
- January 19, 2011

Shares of department-store operators climbed Thursday as investors made bets on which retailers may follow Dillard’s Inc. in its plan to form a real-estate investment trust.

Dillard’s said in a regulatory filing late Wednesday it believes the formation of a REIT may enhance its ability to access debt or preferred stock and improve its liquidity. The retailer said it plans to transfer interests in certain properties to the REIT and will then lease back the properties.

“This announcement could force a reappraisal of the negative stance that many of the department stores have been viewed by the investment community over the last two months. If the transaction were to be completed, significant attention will be placed on the value of retail real estate going forward,” Credit Suisse said in a note.

Dillard’s shares surged 12 percent, to $42.18, and lifted shares of other department stores despite weakness in the broader market. Among the biggest gainers were Sears Holdings Corp. , 5 percent higher at $75.81,; Macy’s Inc., which climbed 2 percent, to $23.33; and J.C. Penney Co. Inc. , up 3 percent, to $30.13. None of the companies were immediately available for comment.

J.C. Penney has been the subject of speculation since activist investor William Ackman’s Pershing Square Capital Management and real-estate investment trust Vornado Realty Trust disclosed a large stake in the company last fall.

Ackman tried in 2009 to get himself and four other dissident candidates elected to Target Corp.’s board. At the time, he was one of the company’s largest shareholders, and had proposed a real-estate transaction in which Target would have spun off the land under its stores as a publicly traded real-estate investment trust, something the company rejected. He has since trimmed his stake after losing the bid.

Cort Gwon, director of research at FBN Securities, noted that J.C. Penney is likely further along in the process of analyzing its capital structure than other retailers due to the stake held by Ackman and Vornado.

Dillard’s plans come at a time when REITs are surging after one of the worst downturns in commercial real estate in a generation. REITs outperformed the broader equity markets again last year and mall and shopping-center REITs were among the top-performing sectors amid rising retail sales and an economic recovery.

One could argue department stores should get out of the real-estate business and in essence that’s what Dillard’s is doing, BMO Capital Markets analyst Wayne Hood said. “On the other hand, when you bring back on the balance sheet the lease liability, leverage will increase in a business that’s very difficult,” he said. Sphere: Related Content