HBC proceeds with REIT spinoff after Fairview deal
Hudson’s Bay Co. is forging ahead with plans to spin off a real estate investment trust, as retailers continue to seek ways to unlock value from their properties.
Some industry players questioned whether a REIT would still be in the works after HBC announced on Monday it is selling one of its best locations, the flagship Queen Street store in Toronto, to Cadillac Fairview Corp. Ltd. But HBC says the deal is intended to pave the way for a spinoff.
“We are seriously focused on a REIT going forward,” HBC chief executive Richard Baker said in an interview. “We think this was a good first step towards getting a REIT done.”
The $650-million transaction will help analysts get a better handle on the value represented by the rest of HBC’s portfolio, Mr. Baker said. One analyst called the price “remarkable” and others agreed that it may open eyes to the potential worth of the company’s other properties.
“The Queen Street location was one of the corporate jewels, but it certainly wasn’t the only one,” said Canadian Imperial Bank of Commerce analyst Alex Avery. HBC has fetched a “fantastic” price for the property, and bought more time to work on any plans for a REIT, he added.
“It’s a huge, significant deal,” said John Crombie, a senior managing director at brokerage Cushman & Wakefield. Major retail sites of this size change hands rarely.
The Queen Street store is attached by a pedestrian bridge to the Eaton Centre, which Cadillac Fairview owns. “The demand for retail real estate is huge,” said Cadillac Fairview CEO John Sullivan. “We view the Eaton Centre as irreplaceable.”
Cadillac Fairview is the real estate arm of the Ontario Teachers’ Pension Plan, which is also a major investor in HBC, having invested $500-million (U.S.) in the retailer last summer to help finance the takeover of Saks. (Mr. Sullivan said Cadillac’s real estate deal was approved by its board and kept separate from Teachers’ interest in HBC.)
Mr. Baker said Monday the company is working “expeditiously” on the REIT. His hope is that the news will spur the market to reconsider the value it places on the rest of the company’s real estate portfolio, which includes the flagship Saks store on 5th Avenue in New York. The strategy appears to be working.
“Given what appears to be a good value for the Queen Street location, [this] may lead to expectations of upside to value of other properties,” analysts at Credit Suisse wrote in a note to clients.
Royal Bank of Canada analyst Tal Woolley said he had previously estimated the Queen Street property was worth $500-million to $600-million.
Monday’s deal could spur some real estate players to put in offers for other landmark HBC properties, such as the Saks site in Manhattan and some of the Lord & Taylor flagship locations, Mr. Woolley added. While HBC is not looking to do more of these deals, selling such properties could turn out to be an easier way to surface value than trying to create a REIT.
One analyst who did not want to be named noted other retailers that have spun off REITs recently, such as Loblaw and Canadian Tire, have investment-grade credit ratings, unlike HBC, with its higher debt load. An HBC REIT would presumably have had lower valuations because of that, and so this deal made a lot of sense, he said.
STORY BY: MARINA STRAUSS AND TARA PERKINS
The Globe and Mail