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Hudson’s Bay, Saks, and Sale-Leaseback Transactions
“Tycoon shows his real estate savvy with sale of Hudson’s Bay store”
(G&M Jan 27, 2014)
We don’t know Mr. Baker, and we weren’t involved in this transaction in any way (although
we would have liked to have been). But headlines like this catch our eye, and make us want
to run the numbers to see what’s what. Call it an occupational hazard, but our kitchen table
conversations often start with “wow, did you see what that Baker fellow did with the Bay
store? How does that work?”
The headline describes a transaction whereby the flagship Bay store and adjoining Simpsons
Tower were sold to Cadillac Fairview for $650 million. The implication is that, given that the
entire Bay enterprise was purchased for $1.1 billion in 2008, this transaction alone has
returned more than half of the cost of the whole company. Quite a trick.
Love the Bay, love that property, thrilled that it will be better integrated with the Eaton
Centre, but the headline also implies that Cadillac Fairview paid a steep price. Given how
smart the CF guys are about downtown Toronto real estate, something about that doesn’t
seem quite right.
So some back of the envelope numbers using publicly available information:
First the store lease: 851,000 square feet, 25 years, at $25 psf (all according to the G&M,
including an attribution to Mr. Baker on the lease rate).
851,000 sf x $25 psf = $21,270,000 in net operating income (NOI)
Properties like this don’t change hands very often, so it’s hard to come up with an easy
comparable for selling price multiple. But for simplicity, let’s use the CBRE Q4 2013 Cap
Rate survey numbers. They show Toronto regional mall cap rates (NOI divided by price) of
between 4.75% and 5.50%. Given that Queen and Yonge is “Centre Ice” in Canada, it
seems reasonable to take the bottom end (ie. most expensive) of that range, so let’s say
4.75%.
$21,270,000 NOI divided by 4.75% = $447.8 million implied value.
Now let’s have a look at the Simpson’s Tower, again using information that a Google search
will turn up (in this case, a listing for a suite for rent):
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2. 32 floors x 12,000 sq ft per floor =384,000 square feet
Gross rent of $47 to $52 psf, operating costs of $22.89 leaves net rent of about $27 psf
$27 psf x 384,000 sq ft = $10,368,000 in NOI
Again, let’s use the CBRE cap rate survey, this time the midpoint for the downtown Toronto
“A” building range (5.25% to 5.75%), or 5.50%.
$10,368,000 divided by 5.50% = $188.5 million implied value
So, between the two buildings we show a “market” value of
$447.8 million + $188.5 million= $636.3 million implied value
So what all of that means is that the $650 million sale price is reasonable in the context of
today’s market. It would be possible to quibble with the rental rates, with the precise square
footage of the Simpsons Tower, (etc.), but it’s a pretty safe bet that Cadillac Fairview knows
exactly what these properties are worth.
It’s also a pretty safe bet that Mr. Baker knows what he’s doing as well. This feels like a
pretty standard sale/leaseback transaction: The seller (HBC) maintains control over the
property through a long term lease at or near market lease rates, while freeing up $650
million of capital. The buyer gets some trophy properties at a decent price, together with long
term NOI stability from a quality tenant. The bonus to Cadillac: they can now integrate the
Bay store with the south end of the Eaton Centre, which had always been a tortured bit of
compromise between Simpson’s and Eatons.
The other throw in was a new lease for a Saks store at Sherway. No information on that, so
hard to judge.
So it’s probably not right to use the entire $650 million as reducing the effective purchase
price for HBC: sale/leaseback transactions like this are closer to debt deals than asset sales.
That said, you could make the argument that the transaction liberated the equity value of the
real estate at something close to market value, which could be 25% or $162 million or so.
Canadian retail companies have historically always seemed to want to hoard their real estate,
which we never really understood, and this reverses part of that.
Smart deal between two smart parties. But a less interesting headline.
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