It’s no secret that Hudson’s Bay Co. owns lots of valuable retail real estate. Now, the company has put a value on it all — $8 billion — including the Saks Fifth Avenue flagship, which has been appraised at a whopping $3.7 billion.

This story first appeared in the November 25, 2014 issue of WWD. Subscribe Today.

On Monday, HBC disclosed that it’s taking out a $1.25 billion, 20-year mortgage on the ground underneath its 646,000-square-foot Saks flagship in Manhattan, and that in connection with the deal, there was an independent appraisal of the property commissioned by the lenders: Bank of America, N.A., Morgan Stanley Bank, N.A., Goldman Sachs Mortgage Company and The Bank of Nova Scotia.

“There’s been lots of estimates and guesses about the Fifth Avenue flagship, but no one had a proper independent appraisal on this property. This valuation, done as part of our financing, seems to indicate that it’s the single most-valuable retail building in the world that we know of,” Richard Baker, the chairman and chief executive officer of Hudson’s Bay Co., boasted to WWD.

On the other hand, the $8 billion estimate for all of HBC’s owned properties is based on internal assessments. The valuations released by the company could be used as fodder to spin off property into a real estate investment trust in a pitch to investors. Baker told WWD that the company is exploring ways to capitalize on its real estate to increase shareholder value and strengthen its retail operations and that a REIT is one of them. Property sales and leasebacks, or further leveraging the Saks flagship with a second financing in the future would also be examined. Baker said he will disclose the balance of the real estate strategy by the end of fiscal 2014. At one time, putting an office tower atop the Lord & Taylor flagship on Fifth Avenue and shrinking the retail square footage was considered but the plans were scrapped.

The $3.7 billion value put on the Saks flagship surprised industry sources familiar with the property. Not too long ago, around the time Saks was sold to HBC last year, there were reports that the Fifth Avenue flagship was worth between $1 billion and $2 billion.

“It’s one thing to appraise the real estate for billions. It might be another thing if they ever decided to sell it. The best use of the building is to keep it as the retail store,” said one industry source familiar with the site.

It’s clear Baker wants to bolster the flagship’s retail business through the previously revealed $250 million renovation of the site, which is being planned, though he could sell it and lease it back.

“Announcements on properties along Fifth Avenue and the Waldorf Astoria selling for $2 billion clearly indicate that New York real estate is very strong and maybe at its strongest pricing ever,” Baker said during the interview. Earlier this year, the retail condominium at the St. Regis Hotel on Fifth Avenue and 55th Street was sold to Vornado Realty Trust and Crown Acquisitions for $700 million by Compagnie Financiere Richemont, after the luxury goods firm acquired the property for $375 million in 2012.

Other big flagships around the world would be worth billions too, but in Baker’s opinion, not as much as Saks Fifth Avenue, situated between 49th and 50th Streets. “Harrods is very valuable, but the rents in that area are only in the $100 to $200 [a square foot] range,” Baker said. “Rents on Fifth Avenue are in the neighborhood of $3,000 per square foot. No matter how big it is, the value of the Harrods building is not anywhere near $3.7 billion.”

According to Cushman & Wakefield’s Main Streets Across The World report for 2014, New York’s Upper Fifth Avenue, with rental values of $3,500 a square foot per year, became the world’s most expensive retail location, supplanting Hong Kong’s Causeway Bay.

The Saks flagship valuation gives Baker more credibility in his argument that HBC struck a very favorable deal a year ago, when it bought all of Saks for $2.9 billion, including the $500 million in debt. Through the acquisition, HBC picked up the Fifth Avenue flagship and several other valuable Saks-owned properties including the stores in Beverly Hills; Bala Cynwyd, Pa., and Chevy Chase, Md. The Saks flagship, which has 340,000 square feet for selling and sits on 65,000 square feet of ground, accounts for about 25 percent of the luxury chain’s overall volume.

The Toronto-based HBC has 62 owned and ground-leased locations in the U.S. and 19 locations in Canada.

In other news at the Saks flagship, Baker said Marigay McKee, the retailer’s president, and her team have done “a substantial amount” of work on the renovation plans. It’s a long and complicated process involving relocating designers and categories, remodeling floors, elevating the brand image and trying to satisfy everyone. Nevertheless, Baker said the long-awaited project will begin sometime in the first half of next year and will take two years to complete.

The Saks ground lease “continues the pattern of opportunistically utilizing the company’s substantial real estate holdings” to unlock value for shareholders and strengthen the operations, Baker said in a statement. There were two other big real estate deals by HBC — the 2011 sale of Zellers leases to Target for $1.825 billion Canadian (or $1.6 billion) and last February’s sale and leaseback of the Hudson’s Bay flagship on Queen Street in Toronto for $650 million Canadian (or $578.5 million).

The proceeds from the Saks flagship financing will be used to pay down debt, save money and reduce exposure to floating interest rates. A $1.2 billion first lien term loan, which currently has a floating interest rate of 4.75 percent and matures in 2020, will be paid down. The Saks ground mortgage is expected to have a fixed interest rate of less than 4.4 percent, leading to a savings of at least $5 million Canadian, or $4.5 million, the company said. The Saks ground mortgage is interest-only and does not require any principal amortization over its 20-year term. The transaction will result in about $76 million of one-time expenses, including about $33 million that are noncash and will be reflected in finance costs during the fourth quarter of fiscal 2014. The remaining $43 million, which includes a mortgage recording tax of $35 million, is expected to be capitalized and amortized as finance costs over the term of the loan.

Baker also said exposure to floating interest rates are significantly reduced via the ground mortgage, with only 45 percent of the debt floating compared with 89 percent with the other loan which gets paid down.

“As we advance our efforts to create and realize value from our substantial real estate portfolio, it became obvious to us that our Saks Fifth Avenue New York flagship was unique and we should treat this very special asset differently than our other properties,” said Baker. The renovation, he said, “is intended to significantly enhance the store productivity and we believe will lead to material value creation in the asset. This mortgage transaction allows us to capitalize on the value of this asset today, but also provides structural flexibility to capture additional value creation in the future.”

In a conference call, Baker said he was not permitted to disclose the metrics on the appraisal. “We think it’s a very nice evaluation. Internally, we thought the building was worth a bit more.” Going forward, “All options remain open as to how we choose to deal with this building in the future,” Baker said.

He also said that since last year’s acquisition, Saks is on track to reach $360 million in earnings before interest, taxes, depreciation and amortization. While Saks for years was considered a no-growth, modestly profitable business, Baker, during the interview, stressed that the firm is on the expansion path. He pointed out that a store in Sarasota, Fla., recently opened, and coming up are stores in Puerto Rico, Hawaii, Miami, lower Manhattan and in Canada. “No closings are coming up.”

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