SHLDQ Sears Holdings Corporation (CE)

By Suzanne Kapner and Eliot Brown 

Lord & Taylor is selling its flagship New York City store for $850 million, a move that will convert most of the landmark building into office space and the headquarters of real estate startup WeWork Cos.

The transaction, part of an effort by Lord & Taylor's parent Hudson's Bay Co. to reduce its debt, is the most dramatic sign of how even grand stores are giving way to more profitable uses. As fewer people visit stores and more shopping shifts online, retailers from Macy's Inc. to Sears Holdings Corp. are trying to sell or redevelop hundreds of locations, while mall owners are increasingly turning their anchors into grocery stores or gyms.

Lord & Taylor has operated its store on Manhattan's Fifth Avenue since 1914. The limestone structure, in an Italian Renaissance style, was designed by the same architects that built the Saks Fifth Avenue flagship further uptown. Both are now owned by Hudson's Bay, a Canadian retailer that acquired the the two U.S. chains in recent years.

Lord & Taylor will continue to operate a smaller store at the location, but most of the 12-floor building will become WeWork's headquarters and other office space. The Lord & Taylor site was appraised at $650 million in 2016 when Hudson's Bay refinanced the mortgage on the property.

For WeWork, which positions itself as real estate for the millennial generation, the deal for the flagship department store gives it powerful imagery on the changing winds of real estate. The seven-year-old company has become one of the world's richest startups, with a valuation of more than $20 billion. It generally takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month.

Department stores have been struggling with falling sales as shoppers buy more online, shift their preferences to smaller specialty stores and spend more on travel and entertainment. Hudson's Bay, which also owns namesake Canadian chain and a German department store retailer, hasn't been immune. Hudson's Bay's losses nearly doubled to 422 million Canadian dollars (US$333 million) in the first six months of this fiscal year. Sales fell 0.9% to 6.49 billion Canadian dollars.

Earlier this year, Hudson's Bay explored potential combinations with both Macy's and Neiman Marcus, people familiar with the matter said, but the discussions didn't result in deals. And in June, activist investor Land & Buildings Investment Management LLC took a stake in Hudson's Bay and urged the company to consider strategic alternatives, including redeveloping its vast real estate holdings.

"We pay a lot of attention to not only managing our retail business but to creating value through creative transactions with our real estate," said Hudson's Bay's Chairman and interim chief executive Richard Baker.

He added that there is a future for department stores, but they need to make their space more productive. "Department stores aren't going anywhere," Mr. Baker said. "Stores that are well run will be here for a long time."

WeWork formed a joint venture with private-equity firm Rhône Group, which is investing $500 million in convertible preferred shares in Hudson's Bay, as part of the investment. WeWork will also take space in the upper floors of three Hudson's Bay department stores in Canada as well as the Galeria Kaufhof in Frankfurt.

The arrangement is the latest and most dramatic example of how department stores are trying to unload excess space. Sears has leased areas in its stores to sporting goods retailers, grocery chains and health clubs. Macy's sold part of its Brooklyn store to a real estate company that will redevelop it into office space. And Hudson's Bay has leased space in its Canadian stores to Topshop, the British specialty chain.

For WeWork, the deal gives the company a pipeline of large new office spaces in downtowns--its preferred location for its shared office spaces. Future deals with Hudson's Bay are expected to be leases, not purchases like the New York deal, a WeWork spokesman said.

Propelled by a recent $4.4 billion investment from SoftBank Group Corp., WeWork is looking to continue its rapid rate of growth, as it has been doubling in size each year. But finding large new spaces is increasingly challenging, particularly in tight markets like San Francisco or New York.

Since it was founded in 2010 in a small Manhattan office, the startup has swelled to around 10 million square feet around the world. Its private valuation -- higher than the largest publicly traded office landlord, Boston Properties Inc., despite managing a fifth of the space -- has sparked skepticism within real estate circles. The company has said its valuation makes sense based on its plans for rapid expansion.

WeWork is avoiding putting up much cash itself in the Lord & Taylor deal. Its recently launched real estate fund, WeWork Property Advisors -- which is co-managed with Rhone Group -- is buying the building, meaning that outside investors are taking most of the risk on the headquarters deal.

Hudson's Bay expects the transactions to reduce its debt by 1.6 billion Canadian dollars. It forecast "minimal impact on its earnings from the sale of the Lord & Taylor Fifth Avenue building, which, in comparison is many times less productive than the Saks Fifth Avenue flagship building."

Lord & Taylor is considered the oldest U.S. department store, dating back nearly 200 years. It was a pioneer in many ways, becoming the first to install an elevator, the first to open a branch location, and the first to hire a woman CEO, Dorothy Shaver, who was instrumental in making it a beacon for American designers in the '40s and '50s. It was acquired by Canada's Hudson's Bay in 2012 and operates around 50 locations.

Mr. Baker said he expects the partnership to bring an additional 6,000 to 8,000 people to the stores per day. The companies expect to offer reciprocal benefits that will give WeWork members access to exclusive sales and allow Hudson's Bay customers to join WeWorks' member platform.

Eric Gross, a managing partner at WeWork Property Advisors, and M. Steven Langman, a managing director of Rhône Group, will join Hudson's Bay's board. Last week, Hudson's Bay said its CEO, Jerry Storch, was leaving the company on Nov. 1.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Eliot Brown at eliot.brown@wsj.com

(END) Dow Jones Newswires

October 24, 2017 13:34 ET (17:34 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.