The value of department store company Hudson's Bay comes down to its real estate holdings - and it needs to consider redeveloping those investments or going private, activist investor Jonathan Litt told CNBC on Monday.
Credit Suisse Group downgraded shares of Hudson's Bay Co from an outperform rating to a neutral rating in a research report on Friday, April 21st.
We believe this sequence of events underscores a core fact: the path to maximizing the value of Hudson's Bay lies in its real estate, not its retail brands.
Shares of Hudson's Bay Company jumped nearly 13 per cent on Monday after a minority shareholder said the retailer should consider selling its real estate holdings or consider a privatization by management. "In our view, the whole time the company's management has been struggling to navigate this complicated maze of [mergers and acquisitions] options, the answer lies in its own real estate portfolio". The letter pegs the real estate value of HBC at $35 per share, or four times the $8.88 a share the stock was trading at when the letter was drafted. The letter highlights the substantial untapped real estate value embedded in the Company. Hudson's Bay Co has a 1-year low of $8.44 and a 1-year high of $18.60.
Litt called on the board to focus on that issue, saying he estimates the real estate holdings are worth C$35 per share, almost four times HBC's closing price on Friday. Is the best use of this location truly a department store? Specifically, Simon's investment in Hudson's Bay's United States and European real estate (excluding the Fifth Avenue stores) implies a valuation of C$10 per share alone.
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Shoppers visit the redesigned designer boutique at the Saks Fifth Avenue flagship store, in New York City in this September 2016 photo.
Litt, whose firm Land & Buildings Investment Management owns 4.3 percent of Hudson's Bay, sent a letter to shareholders on Monday urging the company to explore those options.
Insiders own about 20% of the company, making any battle Land & Buildings wants to wage an uphill one. In Canada, it has partnered with RioCan Real Estate Investment Trust in the RioCan-HBC Joint Venture. Even if its real estate is worth half of the company's estimates, shares would be worth twice as much as they are, Litt said.
It says real estate executives speak highly of Richard Baker, a real estate mogul who is HBC's chairman and one of its main investors.
HBC's stock, which has been under pressure over the past year or more, has spiked on news of Litt's letter and Land & Building's 4.3 percent stake.