For market and Teachers, Richard Baker’s HBC property deals are no longer enough

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Richard Baker has shown he sees value in real estate that eludes the rest of us.

As the 39th governor of the venerable Hudson’s Bay Co., Mr. Baker has tried to find new ways to make a buck at the country’s oldest company, which was founded in 1670.

The New York-based financier authored one of Canada’s greatest real estate trades. Mr. Baker was widely expected to lose a pant-load of money on the Zellers chain as Walmart Inc. crushed its rival in Canada. Instead, he flipped the leases on 220 Zellers stores to Target Corp. in 2011 for $1.8-billion. This may qualify as the most one-sided property transaction of all time: Target quit Canada within four years after horribly botching its launch.

Why, then, has HBC’s stock performed so poorly, potentially handing Mr. Baker the company through Monday’s buyout offer, and all the upside that will come with redeveloping the flagship properties that remain in the chain’s 300-store portfolio?

Consider Mr. Baker’s run. Where many department stores became wastelands as shoppers moved online, the HBC boss turned empty floors into trendy shared office space by partnering with WeWork Companies Inc. Mr. Baker’s sale of a flagship store on New York’s Fifth Avenue to WeWork in 2017 put US$850-million in Hudson’s Bay coffers. It also forged a relationship that saw WeWork join forces with Mr. Baker in Monday’s $1-billion bid to take HBC private.

The WeWork sale was the latest in a series of transactions that come with one common theme: Mr. Baker sold an asset for far more than anyone else thought it was worth.

In Toronto, he flipped a downtown store to Cadillac Fairview Corp. Ltd. for $650-million. That deal ensured the real estate arm of the Ontario Teachers’ Pension Plan footed at least part of the bill and risk that came from converting half the property into a Saks Fifth Avenue store.

There are no prizes for guessing what Mr. Baker will do if his $9.45-a-share offer for HBC is accepted by investors. Freed from the tyranny of quarterly reporting, he’ll quietly keep selling real estate, repurposing stores and attempting to keep familiar retail chains relevant to a new generation who shop using their phones rather than visiting a store.

Despite Mr. Baker’s enviable track record, sophisticated investors such as Teachers no longer want to be along for the ride. The pension fund agreed to sell 18 million HBC shares to Mr. Baker last January at $9.45. The fact that shares closed at $9.07 on Monday, below the offer price, signals there’s no expected competitor to the buyout bid, and no expectation Mr. Baker will increase his offer.

The market, and Teachers, are signalling that Mr. Baker’s deft touch is no longer enough to fix the company. Even with real estate sales, Hudson’s Bay is bleeding red ink. The company lost $631-million last year, compared with a $139-million loss the previous year.

Investors who are selling into the $9.45-a-share buyout price – a 47-per-cent premium to Friday’s close – are taking a view that the HBC’s governor will run out of trophy properties to sell before he fixes all that ails his various retail brands. Besides Saks and Hudson’s Bay, the company owns the Lord & Taylor chain and Dutch department stores. Hudson’s Bay properties in Germany were sold Monday for $1.5-billion.

HBC’s stock did rally in 2014 after Mr. Baker took the company public in 2012 at $17 a share, but then went on a four-year slide that has led to Monday’s buyout offer. For all the real estate deals and for all the talk of the value of the underlying land – HBC minority shareholder Land & Buildings Investment Management LLC put a $31-a-share valuation on the properties last November – a great many investors have lost faith.

The special committee of HBC directors named on Monday, and advisers Blake, Cassels & Graydon LLP and J.P. Morgan Securities, will be conscious of the fact that many investors want to hand this company over to Mr. Baker and let the real estate mogul work with his own money.

Editor’s note: In an earlier version, the story stated the Teachers pension fund agreed to sell 18 million HBC shares to Richard Baker last week. In fact, it was last January. Hudson’s Bay Co. struck a deal to sell its store in downtown Vancouver in 2018, but the transaction did not close. The Globe and Mail incorrectly reported the sale did take place in an earlier version. Besides Saks and Hudson's Bay, HBC owns a chain of Dutch department stores. An earlier version incorrectly said HBC owned Belgium’s Galeria INNO.