U.S. department store chains have been reporting steady sales declines and a sharp erosion in profitability since the beginning of 2015. Even the best-run companies in the industry have been hurt by plunging mall traffic and off-price retailers' market share gains.

That said, many of the top department store companies have valuable real estate portfolios. The resulting combination of high asset values and weak earnings has drawn the attention of numerous activist investors.

Macy's (NYSE:M) attracted interest from Starboard Value a couple of years ago. However, the activist fund exited the investment earlier this year, as sales declines accelerated at Macy's. More recently, Hudson's Bay (TSX:HBC) and Dillard's (NYSE:DDS) have become targets for real estate-focused activist investors. Let's take a look at whether the activist campaigns at these two companies hold any promise for investors.

The exterior of a Dillard's store

Snow Park Capital Partners thinks Dillard's real estate is worth $6 billion. Image source: Author.

A big fight is brewing at Hudson's Bay

In June, Land and Buildings Investment Management announced that it had taken a 4.3% stake in Hudson's Bay. In addition to owning its namesake chain in Canada, Hudson's Bay also owns the upscale Lord & Taylor and Saks Fifth Avenue chains in the U.S., the Gilt and Saks OFF 5th off-price brands, and the Galeria Kaufhof chain in Europe.

In its initial open letter to the Hudson's Bay board, Land and Buildings called for the company to focus on monetizing its real estate. "Hudson's Bay is a real estate company, full stop. If there is a smarter and better use of any or all of the locations, stores should be closed and redeveloped and put toward their optimal use."

This perspective is understandable, given the company's recent track record. Hudson's Bay posted an adjusted loss of more than $237 million last year (based on Aug. 4, exchange rate). So far, it is on pace to report an even bigger loss in 2017.

Management at Hudson's Bay doesn't appear to be changing course, though. The company has gotten appraisals for its valuable flagship stores in Manhattan and formed joint ventures to hold many of its other properties. These joint ventures could one day be spun off as separate companies. However, management has no appetite for closing or downsizing stores just to sell the real estate.

A horde of taxi cabs are driving down Manhattan's Fifth Avenue, past the Saks Fifth Avenue flagship store.

The Saks Fifth Avenue flagship store has an appraised value of $3.7 billion. Image source: Pixabay.

As a result, Land and Buildings is becoming more aggressive. In a new open letter issued last week, the investment firm made specific recommendations for major changes that could boost the company's stock price. It also threatened to start a proxy battle to depose the board of directors if its proposals are ignored.

Dillard's also gets activist interest

Dillard's is also starting to get activist investors' attention for the second time in the past few years. According to Jeffrey Pierce of Snow Park Capital Partners, Dillard's real estate alone could be worth more than $200 per share, or about $6 billion: nearly three times the current stock price.

Snow Park hasn't been quite as explicit as Land and Buildings, but it seems to have a similar point of view. Many of Dillard's stores are in high-value malls, and it could be more profitable to rent out the space to other retailers than for Dillard's to operate its own stores.

Snow Park isn't advocating any drastic moves yet. However, it will probably change its tune if Dillard's financial results continue going downhill.

Hudson's Bay is the better bet for investors

In recent years, Hudson's Bay has gotten outside appraisals pegging the value of its real estate at more than three times its recent stock price. Furthermore, half of that real estate value (net of mortgages) comes from the two Manhattan flagship stores -- and thus isn't tied up in the future of indoor malls.

There is pretty clearly a lot of untapped value at Hudson's Bay. It shouldn't be hard for Land and Buildings to win support from other investors and thereby force management and the board to unlock some of that value through a new real estate strategy.

Dillard's looks like a much less attractive target. First of all, it is still controlled by the Dillard family, which is unlikely to agree to a plan that drastically shrinks or eliminates the retail operations in order to sell or rent out the underlying real estate.

Additionally, Snow Park may be overvaluing Dillard's real estate. In early 2016, Starboard Value pegged the value of Macy's owned non-flagship stores at $117/square foot and its distribution centers at $59/square foot. Applying those valuations, Dillard's real estate would be worth $5.4 billion. But Macy's has significantly better real estate than Dillard's and the recent downturn in mall traffic has probably reduced the value of many of these properties.

Therefore the value of Dillard's real estate is probably closer to $4 billion than Snow Park's $6 billion estimate. There may be some real estate opportunity in Dillard's, but Hudson's Bay is a much juicier target for activist investors -- and individuals who want to come along for the ride.

Adam Levine-Weinberg owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.