Activist investor Litt faces uphill battle in Hudson’s Bay shakeup

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Jonathan Litt, the U.S. fund manager pushing for change at Hudson's Bay Co., has big plans for the iconic retailer. But the activist investor faces an uphill battle in getting the company's management on his side.

Mr. Litt, 53, may not be a household name in Canada, but he is no stranger to the Canadian public markets and corporate fights. Colleagues describe the former real estate analyst, who cut his teeth in the shopping-mall industry, as outspoken and dogged.

During one conference call in 2002, while working as an analyst at Salomon Smith Barney Inc., he called out Canadian businessman and Barrick Gold Corp. founder Peter Munk for the financial underperformance of real estate investment trust Trizec Properties Inc., of which Mr. Munk was the chairman. Mr. Litt urged Mr. Munk to be more forthcoming with investors about what was causing the company to miss expectations.

Now, the real estate investor has taken aim at Canada's oldest company, pressuring the retailer to make better use of its vast real estate assets and threatening to call a special meeting to remove board directors if the company doesn't get behind his plan. Mr. Litt is pushing HBC to close the gap between its $11 share price and the value of its real estate, which is estimated at $35 a share and includes its flagship Saks Fifth Avenue store in Manhattan, Germany's Galeria Kaufhof, Lord & Taylor and its chain of namesake stores in Canada.

The company's stock has lost nearly two-thirds of its value in the past two years amid a challenging retail environment and it recently announced plans to axe 2,000 jobs from its North American operations.

HBC's slumping share price has made it the latest in a string of Canadian companies to be targeted by activist investors. Other notable examples include Canadian Pacific Railway Ltd. and Montreal-based Valeant Pharmaceuticals International Inc., both of which found themselves in the cross-hairs of Bill Ackman's Pershing Square.

Mr. Litt's suggestions for HBC – of which he holds a nearly 5-per-cent stake – include adding boutique retailers to the first three floors of its Saks Fifth Avenue flagship store, adding high-end condos to the building's upper floors and shrinking the department-store's footprint. He would also like to see the company exit Europe by selling the Galeria Kaufhof real estate, operations or both and focus on its Canadian operations.

"I think where there is a difference in opinion between us and the management team and the board is what to do to unlock that value," Mr. Litt said. "Our view is that each asset should be evaluated on its highest and best use." In some cases, that might mean using the space for something other than a department store.

HBC said in an e-mailed statement that it is constantly evaluating opportunities to create value for the company and its shareholders. "We welcome feedback from all of the company's shareholders, and look forward to continued dialogue with Land & Buildings," the statement reads.

Mr. Litt, an avid cyclist and father of three, grew up in Roslyn, N.Y., graduating from Columbia University in 1987 with a BA in economics and from NYU's Stern School of Business in 1990 with an MBA. He started his career at BrookHill Properties in the late 1980s as an analyst on the acquisitions team, hunting down shopping centres for the company to buy.

After roughly two years, he went to European Investors, where he switched to looking at publicly traded real estate companies. "In the early 1990s when the regulations on how REITs are governed in the United States changed, I thought it was a better mousetrap to be an investor in a REIT than to be a private investor in direct real estate," Mr. Litt said.

Over the following years, Mr. Litt established himself as a respected analyst in the real estate investment-trusts space. From 1994 to 2008 he worked for Salomon Brothers, Paine Webber and Citigroup before striking out on his own.

"He was considered one of the top and most perceptive analysts on Wall Street," says Charles Elson, a finance professor and corporate-governance expert at the University of Delaware.

Mr. Litt had been thinking about returning to investing for some time but delayed his plans because of market timing. "In 2005, I was starting to think about it seriously," he said. That year, he sent out red gumball machines to his institutional investors bearing the phrase: "REIT Bubble Gum: Good Till It Pops."

"As I reflected on it, it was probably not the best idea to go out in the middle of a bubble," Mr. Litt said. So he waited until the bubble had burst before launching Land & Buildings Investment Manager LLC in 2008. The investment firm's aim is to identify heavily discounted real estate in the public markets and work with management teams and boards to unlock its value, he said.

Since its inception, the Connecticut-based hedge fund has engaged with 17 public companies and grown to $400-million (U.S.) in assets under management. The investment firm said it has delivered a roughly 39-per-cent annualized gross return on its completed activist investments.

Mr. Litt's colleagues describe him as vocal and tenacious. "Jon is a REIT legend," says Alexander Goldfarb, a senior REIT analyst and managing director at Sandler O'Neill and Partners. "I'm sure there are times where people think he goes too far, and there are other times where people are happy that he's making a big deal about it. He definitely serves a good role in REIT land because there are situations where things do need to be shaken up."

Mr. Elson, who met Mr. Litt through a mutual lawyer friend about two years ago and was a nominee on Mr. Litt's unsuccessful campaign to join the board of Taubman Centers, described Mr. Litt as a bright real estate investor.

"He's highly respected by the investment community and the real estate community," Mr. Elson said.

Mr. Litt attributes some of his success to the fact that his parents paid for him to attend a boarding school that specialized in educating dyslexic children such as himself. "I wouldn't have gotten out of high school if I didn't go to this school, much less graduate from Columbia and NYU and be in a business that requires me to read, write and do math all day," he said.

For the past two decades, he's been paying it forward by serving as president of the Children with Dyslexia Scholarship Fund. "If there are other kids out there that can't afford it that need the help, we want to be able to provide them with the ability to go to these schools," Mr. Litt said.

As far as HBC is concerned, Mr. Litt said he believes the company can survive, despite the challenges facing the department-store industry as shopping moves online and consumers increasingly choose to spend their discretionary dollars on experiences and travel rather than physical goods.

"There's been a lot of interest in this story, in this company – particularly in Canada – because the department stores are well known," Mr. Litt said.

"We're not advocating shutting it down and firing everybody. We're advocating right-sizing it so it can continue to be around well into the future, rather than getting into a situation where it can't survive in its current form."

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HBC's footprint

Key HBC holdings:

The Saks Fifth Avenue store in Manhattan comprises approximately 655,000 square feet of retail space and in 2014 was appraised at a value of $3.7-billion (U.S.).

HBC's wholly owned flagship Lord & Taylor store is also located in Manhattan. The 676,000-square-foot store was appraised last year at $655-million (U.S.).

HBC operates 10 Hudson's Bay properties in Canada in a joint venture with RioCan REIT, including at Toronto's Yorkdale Shopping Centre, and in Vancouver and Montreal.

In 2014, HBC announced plans to sell its flagship Hudson's Bay store on Queen Street to Cadillac Fairview, the company that owns the Eaton Centre, in a leaseback deal.

The following year, HBC partnered with HBS Global Properties to purchase 41 Galeria Kaufhof locations in Germany.

Alexandra Posadzki

Source: HBC investor presentation from spring 2017