U.S. real estate mogul Richard Baker is finding new ways to profit from retailer Hudson's Bay Co.'s properties.
Hudson's Bay's governor and executive chairman said on Wednesday the retailer is teaming with two real estate giants – one in Canada and one in the United States – to create new companies valued at $4.2-billion, paving the way to take them public or for some other deal.
The retailer is forming joint ventures with Toronto-based RioCan Real Estate Investment Trust and Indianapolis-based Simon Property Group Inc., betting the initiatives will shore up the properties' values even more and lead to more acquisitions. The two real estate partners have committed property and cash contributions of more than $670-million to the joint ventures, while Hudson's Bay is contributing a portfolio of many of its key properties valued at more than $3.8-billion.
"We keep telling everybody that we own all this nice real estate," Mr. Baker, who started buying retailers about a decade ago, said in an interview. "No one quite believed it. Now we've proved it."
Investors seemed to get the message. Hudson's Bay's stock shot up almost 20 per cent, or $4.38, to $26.57 on the Toronto Stock Exchange.
Hudson's Bay, which also owns U.S. retailers Saks Fifth Avenue and Lord & Taylor, now estimates its extensive real estate portfolio is worth $9.2-billion.
For retailers such as Hudson's Bay, "there is tremendous value in that real estate that is often not being unlocked in any other way," said John Andrew, a real estate professor at Queen's University. He pointed to retailers Loblaw Cos. Ltd. and Canadian Tire Corp. Ltd., which have both gained from having spun out REITs in past years.
Hudson's Bay's move to create separate real estate companies could also serve as a hedge amid signs of some softening in the retail sector, Prof. Andrew added.
Hudson's Bay's latest efforts are among a string of initiatives led by Mr. Baker as he works to cash in on its real estate holdings. In 2011, three years after acquiring Hudson's Bay, he sold most of HBC's Zellers leases to U.S. chain Target Corp. for $1.8-billion – more than the roughly $1.1-billion HBC purchase price. (Money-losing Target Canada is now leaving the country.) Last year, Hudson's Bay sold its flagship Toronto Queen Street store and office building to Cadillac Fairview for $650-million.
Late last year, Hudson's Bay revealed its iconic Manhattan Saks Fifth Avenue store was valued at $3.7-billion (U.S.) according to an independent appraisal, which is more than its $2.4-billion purchase price of the entire Saks Inc. about a year earlier.
Mr. Baker "is very smart at unearthing value," Edward Sonshine, chief executive officer of RioCan, said in an interview.
The Hudson's Bay chairman said by partnering with real estate leaders, it is positioning itself for growth and diversification into non-HBC properties. The structure also gives it the flexibility to create REITs "at any time," Mr. Baker said.
Mr. Baker said HBC is excluding the Saks Fifth Avenue store from the joint ventures because it is "going to get materially more valuable as we renovate it."
Over all, the transactions will put Hudson's Bay in a better position to make other acquisitions of retailers with attractive real estate holdings, he said.
As part of the deal, the joint venture will incur new debt, with proceeds going to Hudson's Bay. It said it will use the roughly $1.1-billion (Canadian) in expected cash to reduce its own debt. "With $1.1-billion less of debt in our operating company and a more efficient balance sheet, we have greater choices and capacity to make acquisitions."
Mr. Baker has a lot on his plate at Hudson's Bay as it focuses on improving its store and digital businesses while expanding its discount Saks Off Fifth chain and bringing Saks Fifth Avenue to Canada by next year.
For RioCan, the joint venture gives it the opportunity to improve and even redevelop prominent urban retail locations, Mr. Sonshine said. It's also another opportunity for RioCan to expand beyond its suburban big-box store roots, he said.