The REIT stuff: Dillard's to get into the real estate biz

On the heels of reporting promising numbers for 3Q 2010 (net income was $14.4 million at 22 cents a share up from last year's $8 million at 11 cents a share) Dillard's ($DDS) announced today they will be moving into the real estate business.

Now, before you start thinking that makes no sense whatsoever, real estate investment trusts (REITs) come with tax benefits that do not exisist in other corporate structures. In a Security and Exchange Comission filing the company explained that forming a REIT might enhance its ability to access debt or preferred stock, which will enhance liquidity, indicating that Dillard's may be a) going to start expanding into new stores or b) re-vamping the already existing stores.

The retailer has hit numerous stumbling blocks in the past and was pretty much written off by Wall Street until 2007 where they launched a massive clean up effort. Management (mostly comprised of members of the Dillard family) started cutting underperforming stores, took a disciplined approach to inventory management, and started stocking the stores with better merchandise. Instead of trying to compete with retailers such as Kohl's ($KSS) Dillard's started to position itself as somewhere between a Macys ($M) and a Nordstrom ($JWN).

"Going into the REIT business is a genius move," says Jeffrey Roseman executive vice president of Newmark Knight Frank a New York commercial real estate broker. "It's like the age old notion that McDonalds isn't in the burger business, it's in the real estate business. This is just another way the retailer is able to increase income on their balance sheets apart from the sale of apparel."

According to thier annual report, Dillard's owns 241 of the 309 stores, roughly 78% of their doors.