NEW YORK (TheStreet) -- News that Darden Restaurants (DRI) will be spinning off some of its properties into a real estate investment trust has left investors and market experts wondering which restaurant or retailer could be next.
"More and more of these companies see a lot of value locked up in real estate assets that isn't being realized when it's part of the larger company," said Alexander Goldfarb, a managing director and senior REIT analyst at Sandler O'Neill Partners L.P. "There's the old adage -- PanAm should have sold the airline but kept the building," he quipped.
A big part of the appeal of a REIT spinoff is that real estate has seen record-high valuations in recent years. "Real estate prices in virtually all property types are at all-time highs," said Jim Sullivan, a managing director at Green Street Advisors, a real estate research and advisory firm in Newport Beach, Calif.
"A lot of corporate America controls a lot of real estate, and there's a lot of motivation to figure out a way to extract value from those real estate holdings," Sullivan added.
Companies like Darden, which owns Olive Garden, Longhorn Steakhouse, and other restaurant chains, are betting that Wall Street will value the firm much higher as two entities than it currently does for a single combined company. "We appreciate the valuation differential between restaurant and real estate companies and are excited to create a new company," said Gene Lee, Darden's chief executive, in a statement.
A REIT transaction also lowers a company's tax bill since REITs aren't required to pay federal taxes as long as they distribute at least 90% of their income to shareholders as dividends.
Darden is the latest chain to make this leap, but likely won't be the last.
Earlier this year, Sears Holdings (SHLD) unveiled plans to spin off more than 200 of its Sears and Kmart properties into a REIT. It plans to sell the properties to the REIT and then lease the stores back, expecting to get $2.6 billion in proceeds from the sale.
The strategy is particularly attractive for companies that are bleeding red ink and need cash to pay down debt or unlock shareholder value.
At Sears, the stock was dragged down by the company's weak retail sales performance. "Sears' brand had diminished and the operating business had diminished -- and they realized the value was in the real estate," said Thomas Bohjalian, executive vice president and portfolio manager at Cohen & Steers.
In February, Hudson's Bay Company, which owns the Saks Fifth Avenue and Lord & Taylor department stores, announced plans to form a $1.7 billion joint venture with mall REIT giant Simon Property Group (SPG) involving 42 of its department stores.