SITTING ON OPPORTUNITY
Activist investor sees real value of HBC in its real estate,
Hudson’s Bay Co. should close and redevelop the stores it owns if it can’t operate profitably as a retailer, according to a U.S. activist investor who revealed his interest on Monday.
“Hudson’s Bay is a real estate company, full stop,” reads the public letter to HBC’s board of directors from Jonathan Litt, founder and chief investment officer of Land & Buildings Investment Management, LLC, based in Stamford, Conn.
The firm has acquired approximately 4.3 per cent of Hudson’s Bay shares.
“If there is a smarter and better use of any or all of the locations, stores should be closed and redeveloped and put toward their optimal use,” reads the letter from Litt.
It points to the Saks Fifth Avenue location across from the Rockefeller Center in New York City as an example of HBC’s prime real estate, describing the spot as “likely one of the most valuable locations not only in Manhattan, but in the United States,” and asks whether the best use of the property is as a store.
“What about a hotel? Or office? Or boutique retail stores the likes of Apple and Gucci? Or an Internet retailer looking to go upscale through a bricks and mortar presence as Amazon appears to be doing with its purchase of Whole Foods,” the letter goes on to ask.
Hudson’s Bay should evaluate all strategic options, including selling or repurposing real estate or taking the company private, according to Litt.
HBC acknowledged receipt of the letter, but declined to comment. “The company is reviewing the letter and will respond in due course,” it said in a statement.
HBC shares soared more than 15 per cent on the news, closing at $10.22.
The letter lands on the heels of a deeply disappointing first quarter for HBC, which operates 480 stores in Canada, the U.S., Germany and Belgium, under banners including Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor. It posted a net loss for the quarter of $221 million.
The true value of the company, according to Land & Buildings, lies in its real estate, not its retail brands.
The letter pegs the real estate value of HBC at $35 per share, or four times the $8.88 a share the stock was trading at when the letter was drafted.
It goes on to say that Land & Buildings has watched over the past few months as HBC publicly sought merger partners, including Neiman Marcus or Macy’s.
“Any transaction of this type would be challenging and complicated. To date, the only result of these efforts has been the stock declining nearly 25 per cent since the deal talks surfaced, and the company announcing last Thursday that it would be undertaking a massive $350 million restructuring to realign its own business ‘to get ahead of the challenging retail landscape,’ ” according to the letter.
“In our view, the whole time the company’s management has been struggling to navigate this complicated maze of M&A (merger and acquisition) options, the answer lies in its own real estate portfolio.”
Hudson’s Bay owns the vast majority of its real estate, according to Land & Buildings.
In the letter, Litt says that while his firm does not know Richard Baker, governor and executive chairperson of HBC, HBC board member Bill Mack, a real estate investor, is chairperson of the board of Mack-Cali, where Litt served as a board member.
Litt is a former managing director and senior property analyst at Citigroup, where he was responsible for global property investment strategy. He founded Land & Buildings in 2008.
“HBC spinning off its real estate assets has been a discussion among analysts since other retailers such as Canadian Tire and Loblaws have done the same thing in the past few years,” said Rebecca Teltscher, portfolio manager, Leon Frazer and Associates Investment Counsel.
Richard Powers, associate professor at the Rotman School of Management and national academic director for the Director’s Education Program, said that while activist investor interest tends to boost stock prices in the short term, it’s less clear whether it is beneficial in the long term.
“By stripping the real estate value out of HBC, can they survive on their own as a retail operation in a very tough market right now? If you’re a betting person, the smart money is probably on ‘No,’ ” Powers said.
“The board’s responsibility is to maintain and grow the long-term value of the company.”
Typically, activist investors go after midsized companies, according to research into Canadian proxy contests by the business law firm Fasken Martineau.
But success provides activist investors with more capital, which makes it possible for them to go after bigger companies such as HBC, Powers said.