How, and more importantly why, is Canada’s oldest department store chain, Hudson’s Bay Company, becoming one of the more influential and successful real estate investment firms in the world? To answer this question, it’s best to go back to 2008, when HBC was bought out by a Greenwich, Conn.-based real estate mogul named Richard Baker, who would appoint himself the company’s governor and executive chairman. Richard Baker is by no means a household name, but in the business world, Baker has positioned himself as a formidable force in the real estate industry.
According to Hollie Shaw of The Financial Post, Baker’s initial strategy to save the almost bankrupt retailer was to make a series of sales to eliminate the unattractive properties from the company’s portfolio, freeing up funds that were reinvested in more valuable holdings, like the $2.9B purchase of Saks Fifth Avenue in 2013. Baker also had a major role to play in the now defunked expansion of the major U.S. retailer Target into Canada, selling Zellers’ leases to Target for $1.8 billion back in 2011.
Just this past week, the retailer announced that it was forming a joint venture with two behemoths in the real estate industry – Toronto-based RioCan Real Estate Investment Trust and Indianapolis-based Simon Property Group Inc. – to create new companies valued at over $4.2B. HBC, under this new deal, is slated to contribute the lion’s share of properties, valued at $3.8B, while its partners will contribute cash and property worth a total of $670 million. HBC stands to net $1.1B after expenses as a result of the deal, which would ideally be used towards reducing their debt. The deal gives HBC a combined real estate portfolio valued at $9.2B, a fact that has already caused Hudson’s Bay’s stock on the TSX to rise about 20% or $4.38, to $26.57 per share.
An interesting point is raised by Shaw, who discusses the reasoning behind HBC.s decision to establish a joint venture, as opposed to “spinning off” the company’s real estate holdings into its own Real Estate Investment Trust (REIT). In Shaw’s opinion, the establishment of a joint venture will allow HBC to diversify credit and enable the ventures to potentially acquire more real estate holdings before taking them public. John Andrew, a real estate professor at Queen’s University told Marina Strauss of The Globe and Mail, argues that “there is tremendous value in that real estate that is often not being unlocked in any other way,” citing retailers like Loblaw Cos. Ltd. and Canadian Tire Corp. Ltd. as examples, each of which have both gained from having spun out REITs in the past decade.
According to Mr. Baker himself, partnering with real estate leaders allows HBC to position itself for growth and diversification into non-HBC properties. And also allows the company the freedom to create an REIT in the future, and that a possible IPO might also be in the works for the newly formed companies that are borne out this arrangement. As a whole, the deal Hudson’s Bay in a better position to make acquisitions of with both retailers and non-retailers who possess attractive real estate holdings.