Hudson’s Bay’s Saks Buy More About RE or Retailing?

When it raised the possibility of creating a REIT, assuming its proposed $2.9 billion merger with Saks Inc. goes through, Hudson’s Bay Co. also raised the question of whether the acquisition is more about the retailing or more about the real estate?

Saks DNA002When it raised the possibility of creating a REIT, assuming its proposed $2.9 billion merger with Saks Inc. goes through, Hudson’s Bay Co. also raised the question of whether the acquisition is more about the retailing or more about the real estate.

In HBC’s investors conference call on Monday, chairman and CEO Richard Baker said, “The acquisition creates a high-value real estate portfolio and the opportunities to pursue strategic alternatives, including potentially the creation of a real estate investment trust to unlock additional value and accelerate deleveraging.”

Shortly later, he referred to the combined company’s “unmatched highly valuable North American retail real estate portfolio.” That assemblage would consist of more than 32 million square feet of retail space, 17 million of it owned or ground leased.

Asked about the possible REIT during the call’s Q&A, Baker responded, “We now have enough EBITDA and we have a portfolio of diversified real estate that is now suitable to do a REIT, and we’re going to investigate it and work on it as expeditiously as we can.”

And to a question about possible alternatives to a REIT, he replied that HBC is looking at every opportunity, but added that “a REIT is highly logical.”

All of that said, there is undeniably a strong retail angle to the proposed deal. Baker said that HBC is looking at adding up to seven full-line Saks stores in Canada, as well as up to 25 Off 5th stores.

 

When asked about the specifics of expanding Saks in Canada, Baker said this could take the form of adding a Saks to an existing store, converting a Hudson’s Bay store to Saks or building brand-new Saks stores.

Still, that real estate portfolio remains compelling.

“I have two polar opposite reactions” to the merger, retail consultant Jeff Green, president & CEO of Jeff Green Partners, told Commercial Property Executive.

The first is that it’s a good time to get into the luxury retail space, which is doing well right now. Green notes, however, that HBC has zero experience in the luxury market and that it hasn’t done much with Lord & Taylor. For example, HBC hasn’t expanded that chain as much as had been anticipated.

Green’s second reaction, recalling the 2005 Sears/Kmart merger, is that this is a play for the real estate, not the retailer.

He points out that Saks has been struggling versus Nordstrom and Neiman-Marcus, and adds that if HBC’s acquisition goes through, “They’re not buying the strongest, they’re buying the weakest.”

“I think this is about the real estate,” Green says, and a REIT is “actually not a bad real estate play,” not least because Saks has some solid locations.

The issue over whether an HBC/Saks REIT comes to fruition, he suggests, likely will be what the economy does over the one to three years that it will take to form the REIT.