UNPACKING HUDSON’S BAY REAL ESTATE HOLDINGS AS ACTIVIST PRESSURE CONTINUES TO BUILDING.

Firm’s strategy released with Q2 earnings report

There has been an increased focus on Hudson’s Bay

Co.’s real estate portfolio of late, particularly after an activist investor pressed the company to squeeze more cash out of its properties. But just how much its properties are worth, and whether that value can be readily accessed, are questions of some debate.

HBC outlined its real estate strategy in secondquarter earnings that were reported Tuesday, with the company suggesting it could sell more leases or properties if the price is right.

This follows pressure from Jonathan Litt, founder and chief investment officer at Land and Buildings Investment Management LLC, which has said it has a stake in HBC “approaching 5 per cent.” Litt noted in a July letter to shareholders that the company’s real estate has been valued at $35 a share by third parties (about $6.4 billion), which was “more than three times the current share price.”

That number is the same one HBC itself noted in a spring 2017 investor presentation, in which it provided an “illustrative valuation” of its primary holdings.

Without a doubt, the biggest asset in the company’s portfolio is the Saks Fifth Avenue flagship store in New York City, which was appraised at approximately US$3.7 billion in 2014. According the analysis provided in the investor presentation, that property has an enterprise value of about $4.88 billion today. After net debt of $1.98 billion — which includes a mortgage plus a $300-million renovation plan — that leaves HBC with an equity value of $2.9 billion.

Land and Buildings, however, has suggested it thinks the Saks Fifth Avenue flagship location in New York City could be worth even more if it is redeveloped as, say, condos.

“Hudson’s Bay is a real estate company, full stop,” wrote Litt in a June letter to HBC’s board.

“If there is a smarter and better use of any or all of the locations, stores should be closed and redeveloped and put towards their optimal use.”

HBC’s second biggest individual asset is also in Manhattan — the flagship of the Lord & Taylor chain, which the company had valued at $865 million in 2016.

After net debt of $528 million, that property’s equity value checks in at $337 million.

The company is also involved in two joint real estate ventures with RioCan Real Estate Investment Trust and Simon Property Group Inc., which were structured to allow for their future public listings, HBC said Tuesday, adding that it thinks “further diversification” would better pave the way for an initial public offering.

For the RioCan venture, HBC contributed 10 owned or ground-leased properties valued at the time at approximately $1.7 billion. For the Simon joint venture, HBC threw in 42 owned or ground-leased properties that were valued by the transaction at $2.1 billion.

The investor presentation valued the RioCan joint venture at about $2 billion and the Simon venture at $6.1 billion. HBC has an approximately 88 per cent ownership stake in the RioCan vehicle and 63 per cent of the Simon, it noted. After debt, HBC’s equity stakes were valued at $1.28 billion and $1.9 billion respectively.

HBC’s equity value in those four entities alone, according to the investor presentation, is about $6.4-billion, which divided by the company’s approximately 182.25 million shares outstanding is around $35.12 per share.

On top of those holdings, HBC also fee-owns a Hudson’s Bay store in downtown Winnipeg, a Saks Fifth Avenue OFF 5TH location in Ottawa, and five Saks Fifth Avenue and seven Lord & Taylor stores in the U.S., according to the company’s annual information form for the fiscal year ended Jan. 28, 2017.

It also owns five and has mixed ownership of another two Sportarena stores in Germany, the form said, in addition to 11 mixed ownership Galeria Kaufhof department stores. The company owns offices in Brampton, Ont. and Jackson, Tenn., and warehouses in Canada and the U.S.

The presentation said its real estate holdings overall has been independently valued at approximately $11 billion.

“We have a tremendously valuable portfolio of real estate which can be monetized in a variety of ways,” said HBC executive chairman Richard Baker, who has a background in real estate, during an April conference call.

A recent note from National Bank Financial on the company presented a more conservative valuation overall for the company, noting the upside case “indicated potential value of $20/share (assumes all owned/ground leased real estate is valued outside of the core retail business).”

“The company possesses solid real estate, an international platform, good store brands, innovative management and strong market presence in select markets,” wrote National analyst Vishal Shreedhar. “However, these favourable investment attributes are offset in part by high financial leverage, low ROIC/ profitability, a challenging industry backdrop, an economically sensitive merchandising mix with high seasonality and low real estate lease coverage.”

VALUABLE PORTFOLIO OF REAL ESTATE WHICH CAN BE MONETIZED.