When Richard Baker and his partners bought Lord & Taylor in 2006, the intent was to cash in on the retail real estate, specifically L&T’s flagship on Fifth Avenue, which could be converted to other uses.

But Baker, the governor and executive chairman of the Hudson’s Bay Co, quickly caught the retail bug, deciding that L&T was worth more as an ongoing retail concern than for its real estate, and embarking on a string of big retail acquisitions including Saks Fifth Avenue and Kaufhof, creating a retail empire with global reach.

In a twist of circumstances, Baker now finds himself under pressure to return to his original real estate strategy due to the depressed price of HBC stock and the challenging retail landscape.

Early Monday morning, Land & Buildings Investment Management LLC, which holds 4.3 percent of HBC shares, sent a letter to HBC’s board to “evaluate all strategic alternatives to maximize shareholder value.” That would include selling off or converting retail real estate to other uses, or taking the company private.

Land & Buildings, based in Stamford, Conn., is an investment management firm specializing in publicly traded real estate and real estate-related securities. The firm, which has taken activist positions in other companies to pressure for change, noted that HBC’s stock has declined nearly 25 percent since talks of the company making further acquisitions surfaced, though on Monday, after sending out the letter, HBC stock jumped 14.3 percent, or 1.27 Canadian, to 10.15.

Land & Buildings suggested in the letter that HBC restrain from further extending its retail empire, saying that a merger of Hudson’s Bay with Neiman Marcus or Macy’s — HBC was recently in talks with both chains — would be “challenging and complicated.” The talks have ceased but could be resumed at a later date.

HBC on Monday morning said “it is reviewing the letter and will respond in due course.” The company declined further comment.

However, in its first-quarter report, Baker stuck by his business strategy, stating, “We strongly believe that our model of combining world class real estate assets, which are less impacted by short-term trends, with our diverse retail businesses, provides long-term value for the company and our shareholders. Management strongly believes in the value of the company’s real estate assets, which are predominantly located in high traffic locations including urban high streets and prime retail shopping centers. To date, HBC has structured two joint ventures as REIT ready vehicles, obtained independent appraisals on its two wholly owned New York City flagships as part of mortgage financings on the properties, and sold equity in HBS Global Properties to third-party investors.

“To continue to highlight the value of its real estate assets, the company may take additional actions which could include the sale of additional equity in its joint ventures or real estate assets, and/or a potential public listing of either or both of the joint ventures, in all cases subject to prevailing market conditions.”

Land & Buildings said since HBC owns the vast majority of its real estate, HBC is worth 35 Canadian dollars per share.

“I find this whole thing quite ironic considering the reason Richard went into retailing in the first place was because he believed the real estate in it was worth more than the retail. His original strategy was to chop it up, but instead he got bitten by the retail bug,” said one market source.

“This real estate activist is telling Richard Baker to stop being a retailer,” said another source.

The letter is considered just an initial step to exert pressure on HBC to monetize the real estate. The activist is likely to pursue meetings with Baker. In addition, Land & Buildings could try to recruit other big shareholders to its cause, and it could seek seats on the board through a proxy battle.

When Baker bought Lord & Taylor from Macy’s in 2006, his plan was to convert the Lord & Taylor flagship on Fifth Avenue between 38th and 39th Streets into condominiums and office space and construct a tower using the air rights. Instead, he decided to keep Lord & Taylor as it was, and has improved the location with renovations and floor changes, including creating new and bigger floors for footwear and dresses.

In 2013, HBC bought Saks Fifth Avenue for $2.9 billion and later had the Saks flagship on Fifth Avenue between 49th and 50th Streets valued at over $3 billion. Baker has also been investing in the site with a near top-to-bottom renovation that so far has included a new format for contemporary fashion called The Collective.

Other valuable retail properties in the HBC portfolio include Lord & Taylor locations in Manhasset, Garden City, Westchester and various Hudson’s Bay sites in Canada.

In 2014, HBC sold its Hudson’s Bay flagship property on Queen Street in Toronto to Cadillac Fairview, raising 650 million Canadian dollars and enabling HBC to carve out space from the Hudson’s Bay flagship to create the first Saks Fifth Avenue store in Canada.

The Lands & Buildings investment fund has also been pressuring Taubman Cos., a real estate investment trust, to improve operations and possibly go private. However, the activist firm was recently unsuccessful in getting two nominees on to Taubman’s board. Lands & Buildings and Taubman have been battling over corporate governance issues since October. Land & Buildings has about a 1 percent stake in Taubman.

In his letter to HBC, Jonathan Litt, founder and cio of Land & Buildings Investment, said as a 4.3 percent shareholder of Hudson’s Bay, Land & Buildings has “watched over the past few months as HBC publicly sought a merger partner such as Neiman Marcus or Macy’s. As has been thoroughly reported, any transaction of this type would be challenging and complicated. To date, the only result of these efforts has been the stock declining nearly 25 percent since the deal talks surfaced, and the company announcing last Thursday that it would be undertaking a massive $350 million restructuring to realign its own business to get ahead of the changing retail landscape.” The restructuring included eliminating 2,000 jobs and changing some top managers.

“We believe this sequence of events underscores a core fact: the path to maximizing the value of Hudson’s Bay lies in its real estate, not its retail brands,” Litt wrote. “In our view, the whole time the company’s management has been struggling to navigate this complicated maze of M&A options, the answer lies in its own real estate portfolio.”

Litt noted HBC unlike its department store peers owns the vast majority of its real estate and ss such, is “one of those rare diamonds in the rough that a real estate investor occasionally finds in a career.”

He estimated HBC is worth 35 Canadian dollars per share. “Even if the real estate is worth half the company’s estimate, the shares would still be worth double today’s share price,” Litt wrote, referring to the stock trading at 8.88 Canadian dollars, prior to public disclosure of his letter.

Litt said HBC was the victim of  a “drastic misprice by the public markets, which is why Hudson’s Bay should evaluate all strategic options to maximize value for shareholders, including monetization or repurposing of real estate or the company being taken private by management.” Litt also said that with HBC’s “modest market cap of 1.2 billion Canadian dollars, and insider ownership of approximately 20 percent, “a go-private transaction could be readily financed.”

Litt went on to question whether the Saks flagship is best used as a department store. “What about a hotel? Or office? Or boutique retail stores the likes of Apple and Gucci? Or an internet retailer looking to go upscale through a bricks-and-mortar presence as Amazon appears to be doing with its purchase of Whole Foods? The point is that with real estate this valuable, there are myriad options for value creation, all of which must be explored.”

The HBC board is “stacked with true real estate professionals,” Litt wrote. He characterized Bill Mack as “a highly successful real estate investor, substantial investor and board member at Hudson’s Bay. He is also chairman of the board of Mack-Cali, where I served as a board member. Bill is a practical and commercial real estate investor who likely sees the extraordinary value in the company’s real estate and would know how to unlock it.

On the other hand, “We do not know Richard Baker, the chairman and chief visionary at Hudson’s Bay, very well. However, other real estate executives speak highly of him. That said, the jury still appears out in our view, if for no other reason than during his tenure, the company’s shares have declined from a high of nearly 30 Canadian dollars to the current $8.88.

“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.”

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