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Saks, Lord & Taylor owner HBC looks to cash in on its valuable real estate

Feb 25, 2015

Hudson's Bay Company (hbc) is joining forces with two commercial real estate titans, one in the United States, the other in Canada, in a bid to achieve what has eluded many retailers: getting full credit for value of the real estate the department store operator owns.

HBC, which owns Saks Fifth Avenue and Lord & Taylor in the U.S,. and Hudson's Bay in Canada, announced on Wednesday that it would create a real estate joint venture in each country using the bulk of its properties, with a view to probably turning the entities into real estate investment trusts and then take them to the stock markets in an IPO in a few years. The idea is for the entities to also end up buying other properties, be they stores, malls or other retailers with attractive store locations.

In the U.S., HBC will team up with Simon Property Group (spg), the largest mall developer, to create a real estate entity that will include 42 Saks Fifth Avenue and Lord & Taylor stores (including locations in top notch malls such as Roosevelt Field on Long Island and Tysons Corner near Washington). Simon will hold 20% in the U.S. venture and put in $278.5 million in equity, along with $100 million to help fund improvements at the HBC stores included in the JV.

The U.S. vehicle will notably not include Saks' Manhattan flagship, which HBC was recently appraised at $3.7 billion, or the Lord & Taylor store 11 blocks south on Fifth Avenue. (The U.S. venture doesn't include the Saks Off Fifth outlet chain either.)

On the Canadian side, HBC formed a JV with RioCan that will include 10 properties including the wildly successful Carrefour Laval mall near Montreal and the downtown Hudson's store in cities like Vancouver, Ottawa and Calgary. HBC's shares on the Toronto Stock Exchange rose more than 20% after the news. All told, HBC said the various transactions combined mean its total real estate is worth about $7.4 billion (and would have been far more if not for the Canadian dollar precipitous drop in recent months.)

These moves follow other recent efforts by HBC to extract money for its valuable property while still continuing to operate such locations. Just over a year ago, it sold the flagship Hudson's Bay store in downtown Toronto for $650 million and will lease the space back for more than two decades. Similarly, the JV's stories will lease back the properties under long-term contracts.

The idea is to separate the real estate from the retail business from an investment vehicle standpoint so shareholders full grasp the value of the holdings, and of course, extract more value should the JV's become publicly traded. But Baker, seen as a real estate wizard more than a retailing expert, said the move would help the three chains.

“HBC is all about world-class operating retailers. But shareholders are entitled to understand the value of the real estate they own," said Richard Baker, HBC's executive chairman and a U.S. real estate mogul. (Baker's NRDC, a U.S. buyout firm, bought Lord & Taylor in June 2006 from Federated Department Stores Inc. for $1.2 billion, and then Hudson's Bay in 2008. HBC bought Saks for $2.4 billion in 2013.)

If HBC does create a REIT, it would be attempting to do what other retailers have tried but not yet done. A few years ago, Dillard's (dds) department stores said they may create a REIT, but never did. A few months ago, Sears Holdings said it would consider separating 300 of its best stores into a REIT to generate cash, eliciting a ton of skepticism. And in 2007, activist investor Bill Ackman tried to force Target (tgt) to dump its stores into a REIT but ultimately failed. Baker said the HBC-led REITs would have good odds of finding investors' favor because they would be diverse and not just hold HBC stores.

REITs must have most of their assets and revenue tied to real estate and pay out 90% of their taxable income as dividends, but generally don’t pay corporate taxes, making them tantalizing for companies. REITs were established in 1960 to give individuals an easy way to invest in income-producing real estate.

HBC can take the Canadian JV public after three years, and the U.S. venture after 5 years. Some $880 million in proceeds will go pay down HBC debt.

Under Baker, HBC has demonstrated a lot of real estate prowess. In 2011, it was able to unload most of its leases in floundering Canadian discount chain to Target for $1.8 billion, getting rid of locations that Target itself is now abandoning with its exit from Canada.

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