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Richard Baker (Michael Falco For The Globe and Mail)
Richard Baker (Michael Falco For The Globe and Mail)

HBC's Baker set to unlock Zellers' value Add to ...

U.S. real estate developer Richard Baker is on his way to accomplishing a feat that has for years eluded his predecessors at Hudson's Bay Co.: reaping a big gain from its Zellers chain.

Mr. Baker, owner of Canada's oldest retailer, which runs the Bay and Zellers, is in talks with North American chains to unload many of his Zellers stores, sources said. It's a move that would re-shape Canada's merchandising market, opening the door to a growing array of U.S. retailers, including popular cheap-chic discounter Target Corp., to quickly expand here.

Mr. Baker is seizing the opportunity to divest of Zellers stores, which have a tough time taking on discount giant Wal-Mart Canada Corp., at a time of unprecedented interest among foreign retailers in operating in this country. The merchants face the challenge of a limited pool of attractive retail space that is available here. As a result, they view Mr. Baker's prime Zellers locations as highly appealing.

While previous HBC executives have looked at unloading Zellers outlets, Mr. Baker is using his close ties with U.S. retailers to help drive complex negotiations with multiple merchants and landlords, industry sources said. He's also cashing in on a Canadian halo effect, because retailers here fared better than their U.S. counterparts in the downturn.

"He's absolutely doing what needs to be done," said Jeffrey Berkowitz, president of Aurora Realty Consultants, a retail and real estate specialist.

Mr. Baker, 45, is no stranger to delicate landlord-tenant negotiations. He and his father, strip-mall magnate Robert Baker, run privately held National Realty & Development Corp., which owns roughly 20 million square feet of shopping centres and other properties with tenants such as Target, Wal-Mart and Kohl's, another large discounter. Today, they are among chains that are looking to expand in Canada.

But Mr. Baker also is familiar with being a retail owner, having gone on a buying spree since 2006 that culminated in his acquisition of HBC two years later. He grappled with retail failures in the recession, including the bankruptcy in 2009 of his regional luxury Fortunoff chain. But he has enjoyed signs of improvement at HBC - especially at its Bay department store chain.

Now industry insiders predict that he is poised to profit from the HBC acquisition, which he completed in 2008 for roughly $1.1-billion. While most of the Zellers stores he is unloading are leased rather than owned, they carry substantial value for retailers who are eager to get into the prime sites.

Chains such as Target would be "buying the accessibility to cheap rents," said Tony Grossi, owner of retail/real estate specialist Grossi NorthBound of New York and Toronto. As a result, the transaction could be lucrative for Mr. Baker, he said. It would leave him with the Bay as his flagship chain, which he is considering taking public later this year.

"In essence his real estate background is allowing him to make money," Mr. Grossi said.

An announcement about a deal, which is expected to eventually lead to the disappearance of the Zellers name in Canada, could come as early as this week.

Zellers stores themselves are not for sale, because they are mostly owned by real estate investment trusts and leased to Zellers. But over the years, Zellers took advantage of its status as a large anchor tenant to negotiate long-term leases at attractive prices.

In some cases, the retailer is only paying $1 a square foot (although the leases average closer to $7). The national average, meanwhile, is nearer to $14. Incoming retailers covet those affordable, long-term leases. And while landlords could try to squeeze more money out of the new retailers, most would likely be happy to see a stronger tenant move in and leave the contracts alone.

"American banners such as a Kohl's or Target are almost certain to drive more traffic to a shopping centre than a Zellers, and HBC should be able to capitalize on this fact" said RBC Dominion Securities analyst Neil Downey. "Hence, I would think all potential parties should be motivated to make a transaction happen"

And while the landlords don't stand to immediately profit from a change of tenants, he said, there are long-term benefits to having stronger anchor tenants in place. It allows them to charge more rent for other storefronts in the same power centre, for example, because more shoppers are likely to visit.

"Let me humbly say as the president of Canada's largest landlord that I think it will be very good for us," said Edward Sonshine, president and chief executive officer of RioCan Real Estate Investment Trust. "I think I'll have a lot of happy shareholders."

While Mr. Sonshine's company is Zellers' largest landlord, RioCan has plans to move away from the large suburban power centres that have been its focus for most of the past decade. Mr. Sonshine believes future growth will come from deep inside the country's largest cities, as residents move into downtown centres to be closer to their jobs.

One project in downtown Toronto has RioCan providing third- and fourth-floor space for a grocery store and department store inside a new condo development, something that would have been unheard of a few years ago.

"Everybody's recognized that endless suburban sprawl, even if the land exists, is bad," he said. "It's bad environmentally and economically. You just can't afford to keep building new infrastructure."

Follow on Twitter: @MarinaStrauss

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