Purchase of Saks unearths hidden real estate win in $3.7 billion building
For some owners of big-name retail chains, the buildings in which the businesses reside are as important as the businesses themselves. Sears Holdings CEO Edward Lampert’s complicated real estate machinations have led some to accuse him of profiting from the decline of the two chains he owns. But the most recent news in big retail real estate deals has raised more eyebrows than it has red flags.
Hudson’s Bay Company, owner of Saks Fifth Avenue, took out a $1.25 billion mortgage on the company’s Manhattan flagship store, the total value of the property having been appraised at $3.7 billion. Hudson’s Bay, led by CEO Richard Baker, acquired the entire Saks Fifth Avenue chain last year for just $2.9 billion.
"The value of real estate on Fifth Avenue in New York City has just skyrocketed," said Peter Schaeffer, principal at GlassRatner Advisory and Capital Group, in an interview with RetailWire. "Retail real estate in New York is just crazy, and I think that Baker and [his investment firm] NRDC — I don’t think it was as much that they were smart as much as the property appreciated above and beyond what they ever planned."
According to The New York Times, Mr. Baker intends to use the mortgage to pay down Hudson Bay’s more expensive debt, and CNBC reported that some of the money will be used to update the Saks building.
Such a real estate play is relatively rare, according to Mr. Schaeffer.
"In all honesty, [Mr. Baker’s] MO has always been to essentially buy retailers that had value in their properties, and use the built-in equity to make his acquisitions," said Mr. Schaeffer. "He’s one of the few that’s been successful with that MO."
One reason for the move’s rarity is limited opportunity. When department stores gave way to shopping malls, retailers moved towards having more outlets, leasing at low rents rather than owning the property.
"The only big retailer today that I know of that owns a lot of stores is Home Depot," said Mr. Schaeffer. "They find it much more economical to build their own stores and operate them than to rent them from someone else."
Despite Hudson’s Bay’s gem of a valuation, some believe the real estate prices in Manhattan may have hit a ceiling.
The Times reports, "Some analysts suggest the party may be ending, with real estate prices in New York sailing beyond the peak of the debt-fueled boom in 2007 and profit margins shrinking."
In an interview with CNBC, Mr. Baker referred to the $3.7 billion dollar store as "a little added gift with purchase."
- Did Sears get gouged by its own CEO? – Yahoo! Finance
- Saks Flagship Store is Appraised For Mortgage at $3.7 Billion – The New York Times (tiered sub.)
- Saks real estate an ‘added gift’: Hudson’s Bay CEO – CNBC
Could there be advantages to chains owning their own stores rather than renting in the new economy? Do such complex real estate plays pose unseen risks or advantages to shareholders?