Hudson’s Bay Co. on Wednesday closed on its joint venture with Simon Property Group, bringing to the fore an emerging strategy within the retail industry to capitalize on often undervalued real estate assets.
“I think what’s become very clear is that a lot of retail operating companies are misvalued because shareholders do not understand the real estate within their companies,” Richard Baker, governor and executive chairman of Hudson’s Bay Co., told WWD. “When one evaluates them correctly, they find greater value. People are starting to do that work.”
That’s exactly what happened at Hudson’s Bay Co., as Baker noted. Since the Toronto-based retailer’s disclosure back in February that it was forming the joint venture partnership with Simon, and a similar one with RioCan Real Estate Investment Trust, which closed earlier this month, Hudson’s Bay Co.’s market capitalization has risen from 3 billion Canadian dollars, or $2.3 billion, to 5 billion Canadian dollars, or $3.84 billion. Together, the joint ventures are seen generating more than $846 million in cash for Hudson’s Bay Co.
Baker also said the joint venture with Simon, while unlocking the value of HBC’s extensive real estate portfolio, also creates the possibility of a Real Estate Investment Trust in the U.S., and provides funds to strengthen the company’s balance sheet and cut debt. “We believe this [closing] is a step along the way to taking the real estate public in the U.S. There is no specific time frame,” he said.
“The other advantage is that we can grow by acquiring properties in the future, in a more efficient manner,” Baker added. “A good example is with Galeria Kaufhof. “Our plan is to put the real estate assets into our joint venture with Simon, which will create value for the real estate company and diversify our portfolio and give us an opportunity to invest in properties in Europe.”
He said HBC has adopted “a global perspective looking to acquire high-quality properties in the retail space.” Asked whether that means single retail properties, chains or shopping centers, Baker replied: “I think we have shown we can do large packages and have stated that we can do one-off deals. We are acquirers of high-quality retail assets globally. I would suggest we have an opportunity to acquire in Europe as well as in the U.S.”
Baker has long been interested in the Neiman Marcus Group, though NMG would be tough to buy considering it was purchased in 2013 by Ares Management LLC and Canada Pension Plan Investment Board for $6 billion. But Baker was a real estate developer long before he became directly involved in retail, and he could acquire properties that are not strategic to Hudson’s Bay Co.’s core operations.
Whatever his next move is, Baker’s maneuvers clearly are being watched by other players and could have influenced activist investor Jeffrey Smith of Starboard Value, who recently called for the spin-off of Macy’s Inc.’s real estate holdings. When that happened, the market capitalization of Macy’s in a day rose $1.72 billion to $24.22 billion.
But Macy’s has already been moving to capitalize more on its real estate, particularly weaker, less productive sites. Macy’s this month said it sold its downtown Pittsburgh flagship to make way for a redevelopment, and the company is also examining options for its Brooklyn flagship and certain other locations.
“When it comes to real estate, the first thing I would say is this is far more complicated than what most people think. And some of the estimates of value in our real estate, I think, have been done overly simplistically,” Macy’s chief financial officer Karen M. Hoguet said last May. “We are studying closely with our key banking partners all the various transactions that have happened lately and all the possible strategies, the pros, the cons, of how you would do it…to see what’s right for us. Our objective is always to maximize value. And up until now, we haven’t seen an opportunity that made sense in terms of a global strategy.”
Starboard pegged Macy’s Herald Square flagship at about $4 billion, Macy’s San Francisco and Chicago properties at more than $1 billion each, and 400 mall sites at about $13 billion. Starboard placed the combined value of Macy’s real estate at $21 billion, representing a substantial component of the company’s $29 billion enterprise value.
Pershing Square Capital Management’s William Ackman once pushed to get Target Corp. to sell the land under its stores and move those assets into a REIT, but Target refused. And last spring, Eddie Lampert’s Sears Holdings Corp. said it would raise more than $2.5 billion by spinning off 254 stores into a REIT called Seritage Growth Properties, for a much-need cash infusion.
Real estate transactions can flag financial difficulties at retail companies, as in the case of Sears, but Baker said that’s not necessarily the case. “There are many strong operating companies where this makes plenty of sense,” he insisted.
To the Hudson’s Bay Co.-Simon joint venture, 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., for an aggregate purchase price of about $1.7 billion. The contributed properties total about 5.4 million square feet.
Simon, the largest mall developer and operator in the U.S., will contribute up to $278.5 million for a 20 percent stake, including $100 million to improve retail properties and the balance for property acquisitions.
Third-party debt at the Hudson’s Bay Co.-Simon JV totaling $846 million was arranged and of this amount, HBC received $600 million for the properties it contributed. The joint venture expects to use the remaining $246 million in proceeds to purchase at least 40 owned or partially owned Kaufhof properties.
Within the industry, Baker has a reputation for pulling off some shrewd real estate deals, including selling the Zeller’s chain in Canada to Target for the mass retailer’s ill-fated Canadian expansion; selling and leasing back the Hudson’s Bay Co. Queen Street flagship in Toronto, and selling the ground portion of the 640,000-square-foot Saks Fifth Avenue flagship in Manhattan and coming up with a $3.7 billion appraisal for the famous site.
In the deal with RioCan, HBC will contribute 10 owned or ground-leased properties totaling 3.3 million square feet, including four Hudson’s Bay Co. flagships in downtown Vancouver, Calgary, Ottawa and Montreal, Canada. RioCan will contribute 325 million Canadian dollars, or $261.3 million, for a 20.2 percent stake, while Hudson’s Bay Co. will have a 79.8 percent stake. Hudson’s Bay Co. is expected to receive about 352 million Canadian dollars, or $283 million, from third-party debt assumed by the venture.
RioCan is expected to contribute 52.5 million Canadian dollars, or $42.2 million, to improve HBC properties. The balance of RioCan’s contributions, 128.1 million Canadian dollars, or $102.9 million, will be used to fund property acquisitions.
The two deals comprise just about all of Hudson’s Bay Co.’s retail real estate with two key exceptions — the Saks Fifth Avenue and Lord & Taylor flagships in Manhattan. The Lord & Taylor flagship is valued at $640 million.
Hudson’s Bay Co.’s financial results will be impacted by the agreements, considering it will be paying rent for the first time on certain properties. Asked about the impact of the new rents, Baker said, “Rents are going up but we’re getting 80 percent back, and interest payments shrink as debt gets extinguished. It improves our financial strength.”
Hudson’s Bay Co. will be paying Simon $105 million in net annual rent, and 85.4 million Canadian dollars, or $68.6 million, to RioCan in annual rent, and signing 20-year leases. There will also be tax implications.