By Suzanne Kapner and Eliot Brown
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 25, 2017).
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 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
more shopping shifts online and fewer people visit stores,
retailers from Macy's Inc. to Sears Holdings Corp. are trying to
sell or redevelop hundreds of locations; mall owners are
increasingly turning anchor store spaces 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 who built
the Saks Fifth Avenue flagship further uptown. Both are owned by
Hudson's Bay, a Canadian retailer that acquired 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 $655 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 gives it a visible position amid
the changing winds of real estate. The seven-year-old company is
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 modern design and flexible
spaces, which it subleases for terms of as short as a month.
Department stores have been struggling with falling sales as
shoppers buy more online, shift their preferences to small
specialty stores and spend more on travel and entertainment.
Hudson's Bay, which also owns a namesake Canadian chain and German
department stores, isn't immune. Losses at Hudson's Bay's 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 Macy's and Neiman Marcus, people familiar with the matter
said, but there was no deal. In June, an activist investor, Land
& Buildings Investment Management LLC, took a stake in Hudson's
Bay and urged it to consider redeveloping its vast real estate
holdings among other strategic alternatives.
"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 Richard Baker, Hudson's Bay's chairman and
interim chief executive.
Department stores have a future, he said, but they need to make
their space more productive. "Stores that are well run will be here
for a long time," he said.
WeWork formed a joint venture with private-equity firm Rhône
Group, which is investing $500 million in convertible preferred
shares in Hudson's Bay. WeWork will also take space in upper floors
of two Hudson's Bay department stores in Canada as well as at the
Galeria Kaufhof in Frankfurt.
The deal 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.
Hudson's Bay has leased space in its Canadian stores to Topshop,
the British specialty chain.
The deal gives WeWork 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 and New York.
Since its founding in Manhattan in 2010, WeWork 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. WeWork
has said its valuation makes sense based on its expansion
plans.
WeWork is avoiding putting up much of its own cash in the deal.
Its recently launched real estate fund, WeWork Property Advisors,
which is co-managed with Rhone Group, is buying the landmark store,
meaning outside investors are taking most of the risk.
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 a day to the stores. 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 25, 2017 02:47 ET (06:47 GMT)
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