By Robbie Whelan 

Rising real-estate values are driving more retail companies to consider splitting off their real-estate assets to generate cash.

Late last month, Hudson's Bay Co., the Canadian parent company of Saks Fifth Avenue and Lord & Taylor department stores, announced a $1.7 billion joint venture with U.S. mall operator Simon Property Group Inc. involving 42 department stores. Hudson's Bay will retain 80% of the joint venture but will lease its store space back from the company. It plans eventually to split off the venture into a real-estate investment trust.

The same month, Sears Holdings Corp. said it would split off as many as 300 of its best locations into a separate company by June to raise money.

Activist investors, meanwhile, have pushed for real-estate split-offs at a half-dozen other companies over the last six months, including fast-food chain McDonald's Corp., department store Dillard's Inc. and casino operator MGM Resorts International.

At least a few companies are taking the suggestion seriously. Late last year, Darden Restaurants Inc. said it had hired bankers from J.P. Morgan Chase & Co. and Moelis & Co. to explore options for monetizing its real-estate portfolio, which includes some 1,200 restaurants such as Olive Garden and Capital Grille. In December, casino operator Pinnacle Entertainment Inc. said it would seek REIT status as part of a split-off of its real-estate assets.

The trend is being driven in part by the record-high valuations for real-estate assets. The Green Street Commercial Property Price Index, a measure of commercial real-estate values across all property types, was up 14% at the end of February, the most recent data available, from its 2007 market peak. The MSCI U.S. REIT Index, a benchmark for real-estate stocks, reached 1192.61 this week, just 3.7% below its early 2007 record.

Low interest rates and high bond prices are also driving investors into real estate, where the yields are better, said Stanley Shashoua, a senior vice president with Simon Property who helped orchestrate the deal for the Lord & Taylor and Saks properties.

Another factor: favorable tax treatment. Since they were established as a corporate structure in the 1960s, REITs have been able to pay little or no tax on their earnings as long as they distribute the bulk of their profits to investors through dividends. Tax savings led to a wave of REIT conversions over the last two years by companies with large real-estate portfolios, including data-storage firms, operators of telecommunications infrastructure and even gym owners.

"If you combine higher multiples with tax savings, there's a lot of creative thinking that goes on," said Jim Sullivan, a managing director at Green Street Advisors, the research firm that produces the price index.

For some companies, a real-estate split-off is a way to shine light on their value so investors will pay a premium for the company's shares.

"We own assets that were invisible to our shareholders and what we've done is expose them to shareholders so they can understand what value is related to the real estate," said Richard Baker, Hudson's Bay's chief executive. "This is a very different type of situation from years ago when retailers sought to create real-estate ventures in order to develop new projects."

Hudson's Bay's shares are up 17% on the Toronto Stock Exchange since announcing its joint venture with Simon on Feb. 25.

The danger for operating companies is that split-off companies won't get the lofty valuations they expect because investors might worry their profits are too dependent on the fortunes of a single tenant.

If Sears or Dillard's or K-Mart gets in trouble, "Even a whisper of trouble is going to affect the cost of equity capital" for a split-off that owns those retailers' locations, said Gilbert Menna, a partner at Goodwin Procter LP in Boston and chairman of its real-estate capital-markets group.

Some market watchers point to the experience of Penn National Gaming Inc., a casino operator that split off its real-estate assets into a REIT called Gaming & Leisure Properties Inc. in late 2013. Since the transaction was completed, Penn National's share price has fallen more than 73%, which was expected because of the value of the assets being separated from the company. Gaming & Leisure Properties has seen its share price fall 16% since the split.

Real-estate split-offs are "a kind of instant way of creating shareholder value," said Alex Bumazhny, a casino analyst who covers Penn National for Fitch Ratings. Mr. Bumazhny pointed out that Gaming & Leisure's shares are trading at 16.5 times earnings, more than twice Penn National's old multiple. "But the jury is still out as far as long-term performance."

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