NEW YORK— Hudson's Bay Co. is selling the Lord & Taylor flagship on Fifth Avenue for $850 million to WeWork Cos. and is getting an equity investment of $500 million from Rhone Capital representing a 21.8 percent stake in the retailer.The figures are in U.S. dollars.The 650,000-square-foot Lord & Taylor flagship will continue in the entire building through the 2018 holiday season and be downsized to 150,000 square feet. The site will serve as the New York headquarters for WeWork.The transactions result in 1.6 billion Canadian dollars — or $1.26 billion — of debt reduction and/or incremental cash and an increase of total liquidity of about 1.1 billion Canadian dollars."This dramatically de-levers the Hudson's Bay Company," Richard Baker, executive chairman and governor of HBC, told WWD.The eventual downsizing of the L&T flagship, located on Fifth Avenue between 38th and 39th Streets, raises questions about the long-term prospects for Lord & Taylor, which is the oldest department store in the country. It was founded in 1826. Business for several years has been tough at the department store chain, with the flagship long experiencing noticeably weak traffic compared to nearby Macy's and Saks Fifth Avenue 10 blocks north. Despite its formidable presence on Fifth Avenue and various changes physical upgrades over the years, the flagship for decades strived to overcome a reputation for being "your grandma's store." It also felt stranded, being blocks away from the hubbub of Herald Square, and too far south of 42nd Street to capture enough of the midtown pedestrian traffic.However, Baker, in an interview just after the announcement of the flagship deal, told WWD, "The future of Lord & Taylor is very strong and very exciting." He said he sees the business maintaining its relatively small brick-and-mortar footprint, but has "huge opportunities online" selling nationwide. "In today's retail landscape, Lord & Taylor does not need a big footprint.…Going forward, we will dial up the online offering and experience."Baker also now holds the title of interim chief executive officer, with the departure of Jerry Storch announced last Friday. A search is under way.Two years ago, the 11-level L&T flagship, which also has a basement, and other Lord & Taylor properties, was valued together at about $640 million. Eleven years ago, when HBC bought Lord & Taylor from Federated Department Stores, which is now Macy’s Inc., the L&T flagship alone was valued at between $300 million and $400 million.At one time, HBC was considering building a tower atop the L&T flagship, but the plan was scrapped. HBC in the past has done some renovation work on the flagship, refreshing the main floor, doubling the size of men's wear to two floors, redesigning the fifth floor with 30,000 square feet devoted entirely to dresses — from prom looks and vintage styles to contemporary and designer labels, and building a large shoe floor, among other changes.The sale of the L&T flagship reflects HBC’s strategy to unlock value in its retail real estate holdings, enabling the company to pay off debt and help finance acquisitions, though it does create rent obligations. Baker said Lord & Taylor will enter into a lease for the remaining space at the flagship.While Lord & Taylor downsizes, Baker said the Saks flagship on Fifth Avenue between 49th and 50th Streets will grow its footprint. "We will be opening up the basement," Baker said. It's expected that as part of the ongoing renovation of the flagship, the basement will house fine jewelry in an area branded as "The Vault." Saks is also planning to relocate beauty on the main floor up to the second floor where a temporary wellness business sits, and bring accessories to the main floor. He said how L&T reconfigures its shrunken flagship and re-merchandises will be discussed at a later date.Among its deals of the past few years, HBC has partnered with Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the U.S. and Germany. HBC contributed 42 owned or ground-leased properties, including the Saks Fifth Avenue Beverly Hills flagship and the Lord & Taylor stores in Westchester and Manhasset, N.Y.In Canada, HBC contributed 10 owned or ground-leased properties in partnership with RioCan Real Estate Investment Trust called the RioCan-HBC Joint Venture. The deal included four Hudson’s Bay flagships in downtown Vancouver, Calgary, Ottawa and Montreal.Earlier, HBC sold its Zeller’s chain in Canada to Target Corp. for the mass retailer’s ill-fated Canadian expansion, did a sale-leaseback on its Hudson’s Bay Co. Queen Street flagship in Toronto and sold the ground portion of the 640,000-square-foot Saks Fifth Avenue flagship in Manhattan.WeWork is a seven-year-old, New York-based company which provides shared work space, with lounges, a sense of community, and services for entrepreneurs, freelancers, startups and small businesses. Some locations even have fitness facilities. WeWork has a valuation of roughly $20 billion and manages 10 million square feet of office space. WeWork members have included startups such as Consumr, HackHands, Whole Whale, Coupon Follow, Turf, Fitocracy, Reddit and New York Tech Meetup. It's had plenty of investors including J.P. Morgan Chase & Co., T. Rowe Price Associates, Wellington Management and Goldman Sachs. It has locations in several countries around the world.[caption id="attachment_11034424" align="aligncenter" width="1024"] Chinese employees at a WeWork coworking space in Shanghai.[/caption]According to Baker, the deal with WeWork opens the door to converting space to the WeWork format at additional HBC department stores. HBC has 61 million square feet of real estate in North America and Europe. The company said it has agreements to lease space to WeWork in Toronto, Vancouver and Frankfurt, as well as with Lord & Taylor in New York. HBC also operates Hudson's Bay, Saks Off 5th, Kaufhof and Gilt.Baker said HBC corporate offices in New York, Toronto, Cologne, Dublin and Bengaluru will be early adopters of the "Powered by We" operating platform that allows WeWork to combine physical spaces with digital systems to more efficiently and effectively design, build and operate office space.The two companies intend to implement a reciprocal benefits program enabling those at WeWork facilities to participate in exclusive HBC sales online and in stores, while HBC customers get to have access to WeWork's We Membership platform."HBC and WeWork have been working together to reimagine retail environments for current and future generations," Baker said. "This is a transformative partnership that rethinks how retailers create exciting environments and leverage less productive space, while substantially improving the value proposition."Immediately upon closing, these transactions are expected to significantly strengthen HBC's balance sheet, enhance our liquidity and advance our core strategies by monetizing the Lord & Taylor Fifth Avenue building and increasing the productivity of key locations, which, taken together, is expected to enable us to drive ongoing value creation," Baker said.The deal should alleviate pressure from activist shareholder Jonathan Litt, founder and chief investment officer of Land & Buildings Investment Management. On Monday, Litt said he would call for a special meeting of Hudson’s Bay Co. shareholders and is also considering a number of proposals, including the removal of directors from the HBC board. Litt has been pushing HBC to capitalize on its real estate for the benefit of shareholders.Baker said that HBC's partnership with WeWork "places HBC at the forefront of dynamic trends reshaping the way current and future generations live, work and shop: the sharing economy and urban and suburban mixed-use real estate planning. WeWork's business goes beyond offering modern, shared office space to creators, leaders and self-starters, by building robust communities. Our partnership with the WeWork team creates new opportunities for HBC to redefine the traditional department store by extending those communities and drive additional traffic to our stores," as HBC adds coworking and community space to its locations.Adam Neumann, ceo and cofounder of WeWork, said in a statement, "WeWork could not be what it is today if it wasn't for our New York roots. The WeWork of today is a testament to the energy and hustle of this great city and it permeates everything we do. The acquisition by WeWork Property Advisors of the Lord & Taylor flagship building on Fifth Avenue is a statement of intent and commitment by WeWork to New York City. As a business with an emphasis on human connections in physical spaces, we will continue to create jobs within this city while simultaneously reenergizing the traditional retail experience."Neumann cited the growing trend toward urbanization. "People from every walk of life are seeking spaces in big cities that allow for human connections. There is no reason why retail space should not be part of that movement.…Retail is changing and the role that real estate has to play in the way that we shop today must change with it."With the nation being overstored, other department store retailers, including Macy's Inc., are similarly examining ways to monetize some of their square footage. Chuck Grom, an analyst from Gordon Haskett Research Advisors, in a research note wrote, "Provided the proximity in location to Macy’s Herald Square store in Midtown, the (Lord & Taylor-WeWork) deal represents the best real-time bogey for what May's could potentially generate if it were to structure a similar sale-leaseback transaction."
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