Score one for activist investors.
Hudson’s Bay Company announced this week that it will sell its Lord & Taylor flagship in New York to office sharing company WeWork and Rhône Capital for $850 million (1.1 billion Canadian). As a part of the deal, Rhône will take a minority stake in the company, purchasing $500 million (632 million Canadian) in convertible shares.
In total, the transaction will reduce HBC’s debt by $1.3 billion (1.6 billion Canadian).
The Lord & Taylor location will continue to operate in the whole building through holiday 2018. After that, the store will shrink to 150,000 square feet (the 12-story building is 676,000 square feet) with the rest of the space devoted to WeWork’s New York headquarters. WeWork will also lease space within additional HBC department store locations, moving into upper floors of Hudson’s Bay stores in Toronto and Vancouver as well as Galeria Kaufhof in Frankfurt.
“This is a transformative partnership that rethinks how retailers create exciting environments and leverage less productive space, while substantially improving the value proposition,” said Richard Baker, HBC’s governor, executive chairman and interim CEO. “Immediately upon closing, these transactions are expected to significantly strengthen HBC’s balance sheet, enhance our liquidity, and advance our core strategies by monetizing the Lord & Taylor Fifth Avenue building and increasing the productivity of key locations, which taken together, is expected to enable us to drive ongoing value creation.”
Illustrating the state of these retail locations, the company said it expects “minimal impact on earnings” from the deal.
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The retail group has been under pressure for some time to create value from some of its real estate holdings. Jonathan Litt, CEO of Land & Buildings Investment Management, which owns about 4.3% of the company’s stock, has been agitating for company to sell its flagships or redevelop them into higher performing businesses like office space or hotels.
In August, news spread that HBC was planning to hire a financial advisor to review all options, including taking the company private, exiting some retail businesses and offloading key real estate holdings.
In particular, Litt had his eye on the Saks Fifth Avenue flagship in New York. But HBC stated in its release that the Lord & Taylor property is “many times less productive than the Saks Fifth Avenue flagship building.”
As the retail industry tries to cope with falling foot traffic and the e-commerce surge, retailers are attempting to reimagine their physical spaces through redevelopments that shrink their footprints as Kohl’s is doing, selling floors in key locations as Macy’s has done and redesigning customer traffic flow to accommodate in-store and online shoppers better, as Target is in the midst of.
“We believe the partnership with WeWork to redefine retailing and reactivate less productive space throughout the company’s global real estate portfolio will put us in a leadership position and add significant value to HBC shareholders,” M. Steven Langman, managing director of Rhône, said.
HBC’s Baker credits WeWork with its ability to build active communities. And as such, he sees the transaction as a boon to HBC department stores because not only are they monetizing unproductive space, but he anticipates a sales boost as a result of the WeWorks presence. “Our partnership with the WeWork team creates new opportunities for HBC to redefine the traditional department store by extending those communities and drive additional traffic to our stores, particularly as we add co-working and community space to existing, vibrant retail locations.”
Adam Neumann, CEO and co-founder of WeWork, says the Lord & Taylor deal underscores his company’s commitment to New York and underscores a larger trend in real estate. “The trend of urbanization is something we must all recognize and understand,” he said. “People from every walk of life are seeking spaces in big cities that allow for human connections. There is no reason why retail space should not be part of that movement.”