A man walks past the Lord & Taylor flagship store, in New York. The store, known for its holiday displays along Fifth Avenue, is being sold to the office space sharing company WeWork. The nearly 100-year-old building will be converted to WeWork headquarters, with less than a quarter of the space remaining for a Lord & Taylor store. Ten of the building's 11 floors are now devoted to retailLord Taylor Flagship-WeWork, New York, USA - 24 Oct 2017

Richard Baker has reawakened retail to the potential value of its own real estate by agreeing to sell the Lord & Taylor prime New York flagship to WeWork — but putting a for sale sign on square footage still isn’t an easy fix for brick and mortar.

For one, selling landmark properties requires a major cognitive shift; retailers have to take a hard look at their strategy and acknowledge that their bread and better — selling stuff — is simply not always the best use of the space, however elegant or well situated.

And while many argue that today’s massive chains obscure huge real estate value, there are few ready examples of retailers really cashing in.

Perhaps, until now.

Right on the heels of its $850 million deal to its Lord & Taylor Fifth Avenue flagship, Hudson’s Bay Co.’s real estate venture is considering selling the Hudson’s Bay flagship in Vancouver, Canada.

The site is part of the venture formed between HBC and the RioCan Real Estate Investment Trust. HBC has hired CBRE and Brookfield Financial Real Estate Group to explore the possible sale of the Vancouver property located at 674 Granville Street. The Hudson’s Bay store has a long-term lease there and has recently undergone renovations.

Additionally, the joint venture expects to close on a $200 million mortgage on the same property, the proceeds of which would be distributed on a pro-rata basis to the venture partners. The mortgage is expected to be for a term of four years at a rate of prime plus 1 percent and has no prepayment penalty in the event of a sale of the property. BMO Capital Markets Real Estate Inc. is acting as the exclusive adviser on this financing.

“We are exploring a sale of this flagship property as the Vancouver real estate market has appreciated significantly over the past several years,” said Baker HBC’s governor, executive chairman and interim chief executive officer. “While no decision to sell has been made, we continue to explore opportunistic transactions to enhance shareholder value. We are committed to operating our Hudson’s Bay store at this location and any possible sale would include the continued operation of Hudson’s Bay at this property.”

The RioCan-HBC venture owns or controls 10 flagship properties in major cities across Canada, including Vancouver, Calgary, Ottawa, and Montreal, as well as a 50 percent interest in Oakville Place and Georgian Mall. Formed in 2015, the joint venture has a mandate to explore future acquisitions that would grow and diversify its real estate portfolio. As of June 30, 2017, the joint venture was owned 88.1 percent by HBC and 11.9 percent by RioCan.

Investors have long sought to reap value from retailers’ physical locations, with only mixed results.

Activist investor Jeffrey Smith’s Starboard Value made a run at Macy’s Inc., arguing early last year that the company was sitting on $21 billion in real estate, including $4 billion for Herald Square and $3.4 billion for the chain’s seven downtown locations. The mall-based Macy’s were valued at another $8.9 billion.

But Smith is out of the picture now and the retailer and its real estate remain, with a total market capitalization of just $6 billion.

Before Smith, activist William Ackman tried — and failed — to separate Target Corp. from its real estate.

Perhaps that’s because retailers are, well, retailers.

“A lot of these deals get held up because of the management,” said Pete Madden, a director in the retail practice at AlixPartners. “There are usually strategic reasons, but also emotional reasons to not let go. Ultimately, the constant is management doesn’t want to take a hard look at their strategy.”

Baker, executive chairman and governor of the Hudson’s Bay Co., might be something of an outlier in that regard because, while he clearly caught the retail bug, he came from real estate. At the WWD CEO Summit last week, he noted: “Being a retailer, that is too tough. Man that is tough. The second business we are in is the real estate business. That’s not as tough. It’s a place where we can make a lot of money.” (He also cited a third business: mergers and acquisitions).

Madden said Baker’s Lord & Taylor deal was “a bit of a head turner” given the rich valuation and the structure, which lets the retailer keep 150,000 square feet of leased space in the 650,00 square foot building.

Clearly the building was a diamond of shareholder value in the rough. Baker agreed to sell the flagship to the coworking wunderkind WeWork, well above the property’s estimated value. Hudson’s Bay has said the store was appraised at $655 million for lenders last year — $195 million less than the actual sale price. And when HBC bought Lord & Taylor in 2006, it was valued at between $300 million and $400 million.

Although the deal made plenty of headlines, it didn’t cause a big reaction in retail stocks, although it appeared to have stoked some interest among investors in the bonds of Neiman Marcus, which is carrying $4.7 billion in debt and does have some prime real estate in its portfolio.

According to S&P Capital IQ, Neiman Marcus bonds coming due in 2021 rose 5.4 percent to 60.63 cents on the dollar in the three trading sessions after the Lord & Taylor deal was made public. (The bonds have since fallen back down to 59.50 cents on the dollar).

One problem with valuing retailers by their real estate is that each location has its own quirks that make it desirable, or not.

“There’s not a building you can buy on Fifth Avenue in the Midtown area and have the whole thing or most of it delivered to you vacant, that’s very hard to find,” said Richard Kestenbaum, partner at Triangle Capital. “Anybody that has a need for a large space and wants to be in that very heavily trafficked area doesn’t have a lot of choices, so prices are going to be high.”

That’s not the case for many suffering store locations, particularly anchor spots in malls where multiline retailers got sweetheart deals because they helped draw other tenants.

“The question now for a lot of retailers is, can I still do retail that’s worth more than the real estate, because so many of them are withering,” Kestenbaum said. “You just look at the J.C. Penney earnings announcement [which on Friday cut third-quarter expectations significantly] and you say to yourself, ‘I wonder which stores are worth more closed than open.’

“The only way to do it is to do it in incredibly exhausting detail and that’s not typically how you look at retail,” he said.

Retail estate values have risen and retail values have fallen, but it’s hard to generalize which one is higher in absolute terms at any given moment.

For Baker, perhaps, the answer seems to be clear.

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