Hudson’s Bay to Launch Two Mega JVs

By Scott Baltic, Contributing Editor

Hudson’s Bay store, Calgary

Hudson’s Bay Co. has entered into two agreements, one with Simon Property Group Inc. and the other with RioCan Real Estate Investment Trust, of Toronto, to form two joint ventures that will focus on “real estate growth opportunities in the United States and Canada, respectively,” the Canadian retailer announced Wednesday.

Between them, the two joint ventures reportedly are valued at C$4.2 billion (US$3.4 billion), each is structured so as to facilitate an IPO or other monetization transaction at some future date.

The scale of the assets that Hudson’s Bay is pouring into these two ventures shows the company’s commitment. To the Simon JV entity, the larger of the two, HBC will contribute 42 owned or ground-leased properties totaling 5.4 million square feet, including the Saks Fifth Avenue Beverly Hills flagship and the Westchester and Manhasset Lord & Taylor stores. The JV entity will lease back its properties to HBC under long-term triple-net operating leases.

This transaction values the properties contributed by HBC at U.S. $1.7 billion (C$2.1 billion). In addition to an eventual pro forma 80 percent equity stake in the JV entity, HBC is expected to receive U.S. $600 million (C$750 million) in cash proceeds from third-party debt issued by the JV entity, which HBC will use to reduce existing indebtedness.

For its part, Simon has committed to contribute up to U.S.$278.5 million for an eventual pro forma equity stake of 20 percent. Simon will make U.S.$100 million of contributions available for improvements to HBC properties contributed to the JV entity, half on closing and half a year later. The balance of Simon’s contribution will fund future property acquisitions to increase the JV entity’s value and diversify its tenant base.

Once formed, the JV entity will pursue “attractive credit tenant, net-leased and multi-tenanted retail buildings” in the United States, as well as “similar international opportunities,” according to HBC.

“This joint venture will benefit from a strong foundation of HBC properties… [and] will also unlock additional long-term value for HBC shareholders by positioning the joint venture to transition to a more valuable and sustainable publicly traded REIT than HBC could create today,” Richard Baker, governor and executive chairman of HBC, said in the announcement.

“In HBC, we have found a unique partner with a proven track record of creating value from retail properties, as well as a strong portfolio of banners that serve as attractive tenants for a range of retail opportunities,” David Simon, chairman & CEO of Simon, said in a release. “Together, we will leverage our combined expertise to significantly expand and diversify the joint venture assets.”

To the RioCan JV entity, HBC will contribute 10 owned or ground-leased properties totaling nearly 3.3 million square feet, including Hudson’s Bay downtown stores in Vancouver, Calgary, Ottawa and Montreal. The transaction values the HBC real estate contribution at approximately C$1.7 billion (U.S.$1.36 billion). In addition to an eventual pro forma 79.8 percent equity stake in the JV entity, HBC is expected to receive approximately C$352 million (U.S.$282 million) in cash proceeds from third-party debt to be arranged in advance by HBC and assumed by the JV entity, and the JV entity is expected to assume approximately C$48 million (U.S.$38.4 million) of existing debt secured against one of the properties contributed by HBC.

RioCan will contribute C$325 million (U.S.$260 million) to the JV entity for an eventual pro forma equity stake of 20.2 percent. Its equity contribution will comprise a 50 percent interest in two malls in Ontario (Oakville Place and Georgian Mall), certain capital lease obligations, contributions in the form of improvements for HBC properties contributed to the JV entity and funding for future property acquisitions.

RioCan is Canada’s largest REIT and owns and manages Canada’s largest portfolio of shopping centers; it has ownership interests in 340 retail properties totaling more than 79 million square feet, including 48 retail centers totaling 13 million square feet in the United States, as well as 15 properties under development in Canada.

Both transactions have been approved by HBC’s board of directors, and both are expected to close within about 90 days, subject to securing acceptable debt financing for each JV and other customary conditions.

“By partnering with industry leaders, we have created two tremendous real estate vehicles for growth,” Baker said. “Importantly, we have retained the flexibility to create REITs at a future date of our choosing.

The JV partners’ property and cash contributions of more than C$670 million (U.S.$53.6 million) value HBC’s property contributions at more than C$3.8 billion (U.S.$3.04 billion) based on a blended cap rate of about 5.67 percent, according to Baker.

Together, according to HBC, these two transactions support a value for the company’s real estate assets of C$9.2 billion (U.S.$7.4 billion): U.S. JV, C$ 2.1 billion (U.S.$1.7 billion); Canadian JV, C$1.7 billion (U.S.$1.4 billion); Saks Fifth Avenue NYC flagship store C$4.6 billion (U.S.$3.7 billion); Lord and Taylor 5th Avenue flagship and other real estate C$800 million (U.S.$640 million).

“A stronger balance sheet and enhanced financial position will enable us to invest in growth initiatives across our retail business, including strengthening the connection between our store and digital businesses, expanding our off-price channel and investing in our world-class store base,” HBC CEO Jerry Storch said.

The approximately C$1.1 billion (U.S.$880 million) in expected net cash proceeds from the JVs will be used to reduce debt on HBC’s balance sheet.

Hudson’s Bay operates 90 full-line department stores and two outlet stores in Canada; 50 full-line Lord & Taylor locations, primarily in the Northeast and Mid-Atlantic, as well as four Lord & Taylor outlet locations; 38 Saks Fifth Avenue stores in the United States, as well as five international licensed stores; 79 Saks Off 5th stores in the United States; and 67 locations of Home Outfitters, Canada’s largest chain of kitchen, bed and bath superstores.