Hudson's Bay Co. has a $1-billion deal to sell its Lord & Taylor flagship store in New York to a joint venture that includes WeWork Cos. The retailer will also team up with the office-sharing business to run its operations in parts of HBC's stores.
In addition, Toronto-based HBC, which is under pressure from an activist shareholder to monetize its real estate, said Tuesday that private equity firm RhoneCapital LLC is investing $632-million in HBC, which also runs its namesake stores and Saks Fifth Avenue.
The retailer will continue to operate its Lord & Taylor store on Fifth Avenue in a significantly shrunken space – less than 25 per cent of the current space – after WeWork converts the upper floors of the building into its New York global headquarters as well as shared office space it can lease to other businesses or individuals.
As part of the deal, WeWork will also lease space on the top floors of HBC's flagship stores on Queen Street in Toronto, Granville Street in Vancouver and Galeria Kaufhof in Frankfurt, Germany, as a way to use the big stores' space more productively.
"It shows the world that our real estate assets continue to be worth more than people previously thought," Richard Baker, HBC's executive chairman, said in an interview.
"And it shows that from time to time we're willing to monetize, through financing or a sale, certain real estate assets."
The unusual deal underlines the shakeup in the retail landscape as consumers increasingly browse and shop online, forcing retailers to shrink or find new ways to use their bricks-and-mortar space.
Amid the changes HBC has faced rocky times with weaker results, a big staff downsizing in the summer and the departure of some key executives, including Jerry Storch, its chief executive officer, who will leave the company on Nov. 1.
And HBC is feeling the heat from activist shareholder Land & Buildings Investment Management LLC to squeeze more value from the retailer's real estate, especially from its landmark Saks Fifth Avenue store in Manhattan.
On Monday, Land & Buildings, which owns roughly 5 per cent of HBC's shares, threatened to call a special meeting of HBC shareholders to remove the members of its board of directors.
Now, HBC is unveiling the WeWork deal, which, the retailer says, is expected to reduce debt by $1.6-billion and increase its liquidity by about $1.1-billion.
Mr. Baker said the Lord & Taylor flagship store is "many times" less productive than HBC's Saks Fifth Avenue landmark outlet, thus minimizing the effect of the changes on the company's profit.
He said the $1-billion sale price of the Lord & Taylor store is 30 per cent above the most recent appraised value, while the transaction reflects HBC's "creative" streak in its real estate transactions.
WeWork office-sharing will attract more millennials to HBC stores, turning a coveted customer base into new shoppers, he said. "Young millennials will be travelling through our buildings on a daily basis" to get to their WeWork office.
The deal paves the way for HBC to embrace the emerging sharing economy, reimagining how a retailer can cash in from its department stores, he said. "In a world that's in retail transition, there are going to be winners and losers – HBC is very well positioned to be a winner."
He said the teaming up with WeWork, a seven-year-old startup with operations worldwide, will produce future real estate transactions and other opportunities to surface more value from its properties.
Industry observers agreed the partnership has the potential to perk up business at HBC stores at a time when it and other retailers struggle with declining numbers of people coming to their outlets.
"It is a way of just bringing more traffic to the stores," said Matthew Smith, an executive vice-president at commercial real estate firm Jones Lang LaSalle.
Paul Morassutti, executive managing director with CBRE, said the deal ensures HBC that it will "have a couple of floors dedicated to younger, more creative people" who will be coming to WeWork and also could shop at the stores.
Department stores generally generate fewer sales on its top floors, where WeWork will be located, leaving the retailer on the lower floors where more people shop, said Alex Arifuzzaman of retail real estate adviser InterStratics Consultants.
The HBC move to reduce its bricks-and-mortar selling footprint is a trend being adopted by other retailers as more shoppers head online, he said. "It's a first step of an evolving strategy in terms of driving up profitability."
HBC's stock closed up 2 per cent at $11.98. Jonathan Litt, founder of activist shareholder Land & Buildings, had no immediate comment. He had been pushing for HBC to take even more steps to monetize its real estate.
RhoneCapital's $632-million equity investment is in the form of eight-year mandatory convertible preferred shares initially convertible into the company's common stock at $12.42 a share, with the conversion price subject to adjustment from time to time, according to the terms of the preferred shares.
The iconic Lord & Taylor store on Fifth Avenue is being sold to WeWork Property Advisers, which is a joint venture between WeWork and Rhone.