Marcato Capital Management, the activist hedge fund headed by Mick McGuire, urged the board and management of Dillard’s, Inc. (NYSE:DDS) to spin off its real estate assets into a real estate investment trust (REIT).

Marcato Capital Management owns 4.9% of the outstanding shares of Dillard’s, Inc. (NYSE:DDS). The activist hedge fund believed that pursuing a REIT spin off would significantly increase value for shareholders.

In a statement, McGuire praised Dillard’s, Inc. (NYSE:DDS) for effectively executing its business plan, improving its inventory and gross margins. The company also reduced excess SG&A and unproductive advertising expenses and closed underperforming stores.

McGuire also emphasized, “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

Marcato Capital’s analysis on Dillard’s value

Marcato Capital Management analyzed the underlying value of the real estate assets of Dillard’s, Inc. (NYSE:DDS) and the compelling case for the creation of a stand-alone REIT.

If Dillard’s, Inc. (NYSE:DDS) creates a stand-alone REIT, the activist hedge fund estimated that  the combined value of the companies would increase by 75% to $193 per share.

Marcato Capital Management pointed out the several major companies with significant real estate assets already announced their desire to explore a REIT spin off.  The activist hedge fund is encouraging the leadership of Dillard’s, Inc. (NYSE:DDS) to do the same.

Dillard’s stock price surges

The stock price of Dillard’s, Inc. (NYSE:DDS) surged more than 11% to $123.13 per share after Marcato Capital Management released its analysis on the company.

Over the past 52-weeks, the shares of the department store operator traded between $82.75 per share to as much as $125.17 per share.  Dillard’s, Inc. (NYSE:DDS) has a market value of approximately $5.2 billion.

Last week, Dillard’s, Inc. (NYSE:DDD) reported that its earnings for the third quarter increased to $55.2 million or $1.30 per share from $50.9 million or $1.13 per share in the same period last year.  Its net sales were $1.46 billion.

The company completed its remaining $224.5 million shares repurchase authorization during the quarter. CEO William Dillard II expressed confidence that the company is well-positioned for the holiday season.

See the full presentation here Marcato