Investment Groups Eye Retailers
For Prime Real-Estate Holdings

By Henny Sender
From The Wall Street Journal Online

The housing market is deteriorating, but many private-equity firms and hedge funds still see real estate as a game worth playing.

They've taken over retailers such as Toys "R" Us, Sears Holdings and Kmart, hoping to cash in on real-estate holdings the market undervalued. And some investors are now looking to other sectors for companies sitting on potentially valuable real estate.

For some proprietary-trading desks at investment banks and hedge funds, one of the better guides to that game is a report from Citigroup's Citigroup Global Markets that came out within the past few weeks highlighting stocks that have substantial real-estate value relative to the total value of their enterprise (meaning the market value of stock plus debt).

Many of the companies on the list are restaurant chains, including Bob Evans Farms, Denny's and Lone Star Steakhouse & Saloon. Also high on the list, produced by Citi senior analyst Jonathan Litt, are health-care companies including Tenet Healthcare, Capital Senior Living and Genesis HealthCare.

Mr. Litt has a good track record. Of the 103 companies he singled out in a similar list last year, 14 were acquired or part of mergers. Those acquired companies generated an average return of 30.2% between the time he pointed them out and the time they were taken over. Among them was one of the biggest takeover targets ever -- HCA Inc. The overall list outperformed the S&P 500, he says.

More deals from the latest list have been popping up. The last week of July, Buffets agreed to buy Ryan's Restaurant Group, one of Mr. Litt's top picks, for $876 million, a 49.3% premium to the closing price the previous day.

"We bought shares the day after we saw the [latest] report," says a senior trader at the bank of a Citi competitor. In mid-August, Lone Star Funds announced it was buying the unrelated Lone Star Steakhouse, another Litt pick.

But there's no free lunch. At the very top of his latest list is Pep Boys-Manny, Moe & Jack, a struggling car-parts dealer. Pep Boys management has tried to auction the company to private investors, but couldn't close a deal. The list, Mr. Litt says, is only a starting point for investors.