Hudson’s Bay Completes Real Estate Sale To Pay Off Debt

Hudson’s Bay Company has completed the sale of its Queen Street flagship store and Simpson Tower office complex in Toronto to The Cadillac Fairview Corporation Limited for a purchase price of $650 million at an implied capitalization rate of approximately 4.75%. HBC has leased both the Queen Street store and Simpson Tower back from Cadillac Fairview for a base term of 25 years, with renewal terms available at the company’s option. As previously announced, the Queen Street property will serve as the site of Canada’s first Saks Fifth Avenue location, expected to open in the fall of 2015.

“We are thrilled to have completed this transaction, which clearly demonstrates the tremendous value of our real estate portfolio,” stated Richard Baker, HBC’s Governor and CEO. “This sale-leaseback allows HBC to establish a benchmark valuation for one of our many flagship assets, reduce the debt on our balance sheet and accelerate our strategic investments. We remain committed to using our significant real estate holdings to unlock further value for our shareholders and are exploring a broad range of alternatives to help us accomplish this goal.”

According to the company all proceeds from the sale initially will be utilized to reduce the company’s debt. Specifically, HBC will retire in entirety its U.S. $300 million second lien term loan, currently bearing interest at a rate of 8.25%, and permanently pay down U.S. $150 million of its U.S. $2 billion first lien term loan, currently bearing interest at a rate of 4.75%. The balance of the net proceeds will be used to reduce the outstanding balance on the company’s Canadian revolving credit facility. Over time, a portion of the proceeds will provide ample liquidity to fund the company’s strategic investments including the expansion of Saks Fifth Avenue into Canada and growth initiatives such as its HBC Digital and OFF 5TH businesses.

Initially the transaction will result in a reduction to annualized interest expense of approximately $42 million, partially offset by an increase to annualized rent expense of approximately $30 million, HBC reported. Additionally, the transaction will result in approximately $29 million of non-recurring expenses primarily due to the early extinguishment of debt. The decrease in interest expense will be reflected in finance costs, and the increase in rent expense will be reflected in SG&A. The non-recurring expenses will be reflected in finance costs in the first quarter of 2014.