Insights from BJ Feller featured in Shopping Centers Today

Hudson’s Bay Co.’s $100 million deal to sell the Lord & Taylor brand to Le Tote has caught the attention of the retail real estate industry. Hudson’s Bay has not only struck a money-losing mid-market department-store brand from its balance sheet, but also retained some valuable real estate.

Originally published by Shopping Centers Today


Details have not been disclosed, but Le Tote will enjoy at least three rent-free years at nearly 40 locations and has agreed to give Hudson’s Bay an equity stake. The transaction also provides Le Tote, an online women’s-apparel rent-to-wear service, with a national platform — virtually overnight. But beginning in 2021, Hudson’s Bay can recapture some selected locations for higher and better uses, including for mixed-use redevelopments

This deal highlights a question that many are asking with growing frequency: Should struggling department-store operators be retailers or real estate companies? Some continue to see themselves as the former — as evidenced by Macy’s refusal several years ago to yield to the pressure to divest its real estate, observes S. Christopher Herthel, a director at Irvine, Calif.–based accounting firm Moss Adams. “The problem is that the department-store business is less certain and less valuable relative to the real estate,” Herthel said. “That may change if department stores figure out a way to successfully reposition their businesses, but I think you’ll see them continue to maximize the value of their real estate.”

BJ Feller, a Chicago-based managing director with Stan Johnson Co., concurs. “Department stores used to view real estate as an afterthought: It was the horse that pulled the cart,” he said. “But today it’s the other way around: The cart is the real estate, and they’re trying to decouple it from the decaying business.”

The transaction puts a new spin on the ways retailers are leveraging their properties. In the best-known case, Sears Holdings Corp. sold many of its locations to its real estate spinoff, Seritage Growth Properties, yielding it some $2.7 billion in restructuring capital. Conversely, growing companies often generate expansion financing through sale-leasebacks, notes Nicoletti DePaul, a New York City–based senior managing director with Marcus & Millichap’s NNN Pro Group.

In this transaction, Hudson’s Bay is refinancing in a way similar to the Amazon.com acquisition of Whole Foods, amid the latter’s declining same-store sales. An important difference is that Hudson’s Bay can still find better use for its real estate if Le Tote ends up underperforming. In addition to redevelopment, Hudson’s Bay’s solutions could include filling the stores with another retail business, or even itself occupying the space. This is a real estate strategy that operators outside of retail have deployed, DePaul notes. “It really puts Hudson’s Bay in a position of strength, because they know the retail business and players,” he said. “We’re seeing more people exploring this route when business isn’t doing well but there’s value associated with the real estate.”

To Richard Rizika, co-founder of the Beta Agency retail brokerage in El Segundo, Calif., the transaction represents a potential solution for mid-market department stores in particular, as consumers see high-end or discount stores delivering more value. “We’ve all been talking about department-store struggles, especially in the mid-tier, and what they will be in the future,” Rizika said. “This gives Hudson’s Bay a way to buy time to figure out the way the world is going.”

Meanwhile, Shlomo Chopp, a New York City–based value-add investor and real estate restructuring adviser, wonders what Hudson’s Bay’s ultimate New York strategy is. Initiatives over the past several months have included selling its shuttered Lord & Taylor property in Manhattan to WeWork, closing stores and launching a digital strategy. “Hudson’s Bay may have a great plan in the works,” said Chopp, who in 2017 also founded ShopFulfill, a firm facilitating the combination of last-mile fulfillment and retail centers. “But what is in their mind: Is it to be a retailer, an e-commerce company, or a real estate company?”

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