Hudson's Bay Company (“HBC” or the “Company”) (TSX:HBC) has announced plans for a US$1.25 billion, 20-year mortgage on the ground portion of its Saks Fifth Avenue flagship in New York City, located at 611 Fifth Avenue (the “Saks Ground Mortgage”). This transaction is expected to close in early December. In connection with this transaction, lenders Bank of America, N.A., Morgan Stanley Bank, N.A., Goldman Sachs Mortgage Company and The Bank of Nova Scotia, independently commissioned a leading international appraiser to provide appraisals of the land and the building. The independent appraiser valued the entire property at C$4.1 billion (US$3.7 billion) based on the assumption that the entire property is net leased by Saks Fifth Avenue at an estimated current fair market rent.

Transaction Highlights

  • Independent appraisal values Saks Fifth Avenue flagship property at C$4.1 billion
  • Allows HBC to capitalize on value today while preserving flexibility to realize additional value in the future
  • Fixed rate 20-year debt with an expected interest rate of less than 4.40%
  • After giving effect to the transaction:
    • Weighted-average term to maturity of funded debt extended to 11.5 years;
    • Exposure to floating interest rates significantly reduced – only 45% of funded debt will be floating compared with 89% prior to transaction

“As we advance our efforts to create and realize value from our substantial real estate portfolio, it became obvious to us that our Saks Fifth Avenue New York flagship was unique and we should treat this very special asset differently than our other properties,” stated Richard Baker, HBC’s Governor and Chief Executive Officer. “As previously disclosed, we have embarked on a significant project to improve and renovate this, our most productive store. This renovation, which will commence in the first half of 2015 and is expected to cost approximately US$250 million, is intended to significantly enhance the store productivity and we believe will lead to material value creation in the asset. This mortgage transaction allows us to capitalize on the value of this asset today, but also provides structural flexibility to capture additional value creation in the future.”

Mr. Baker continued, “This financing also highlights the significant value embedded in our owned real estate and strengthens our financial position by providing long-term, fixed-rate capital on highly attractive terms. This transaction, which follows the 2011 sale of our Zellers leases for C$1.825 billion and the February 2014 sale and leaseback of our Queen Street property in Toronto for C$650 million, continues the pattern of opportunistically utilizing the Company’s substantial real estate holdings to surface shareholder value while strengthening our operating business. Critically, the transaction allows us to retain tremendous flexibility and control over our most important flagship property including, for example, the ability to vend the property into a REIT or secure additional leverage on the leasehold interest. The appraisal values this one asset at C$4.1 billion, which we believe is less than half of the estimated value of our real estate portfolio.”

All proceeds from the financing, net of associated cash expenses, will be utilized to permanently pay down approximately US$1.2 billion of HBC’s First Lien Term Loan, which currently bears interest at a floating rate of 4.75% and matures in 2020. With an expected fixed interest rate of less than 4.40% on the Saks Ground Mortgage, this transaction will result in a reduction to annualized cash interest expense of at least C$5 million. The Saks Ground Mortgage is interest-only and does not require any principal amortization over its 20 year term. The transaction will result in approximately US$76 million of one-time expenses, including approximately US$33 million that are non-cash and will be reflected in finance costs in the fourth quarter of fiscal 2014. The remaining US$43 million of expenses, which includes a mortgage recording tax of US$35 million, are expected to be capitalized and amortized as finance costs over the term of the loan.

Following this transaction, approximately 80 percent of HBC’s debt will be backed by high-quality real estate, inventory and receivables, allowing it to benefit from attractive debt pricing, with limited or no recourse to HBC’s other retail operations. Additionally, the Company’s capital structure is greatly enhanced through securing 20 year money. Prior to this transaction, the weighted-average term to maturity of HBC’s funded debt was 5.3 years compared to 11.5 years pro forma this transaction. As well, a reduction in the amount of floating rate debt from 89 percent to 45 percent of funded debt is extremely beneficial from a risk management perspective.

The Company continues to make progress in its work to surface value from the balance of its real estate portfolio which includes the Lord & Taylor Fifth Avenue flagship, the Saks Beverly Hills flagship and 59 other owned and ground leased locations in the United States, together with 19 locations in Canada, including flagship properties in many of Canada’s major urban centers. As previously announced, HBC expects to be in position to communicate details of this review by the release of its fiscal 2014 annual financial statements in the spring of next year.

Appraisal Results

Caution should be exercised in the evaluation and use of the independent appraisal results. The appraisals are an estimate of value at a specific date and are not a precise measure of value, being based on a subjective comparison of related activity taking place in the real estate market. The appraisals are based on various assumptions of future expectations, including the assumption that the entire flagship property is net leased by Saks Fifth Avenue at an estimated current fair market rent. While the appraiser’s assumptions are considered to be reasonable at the current time, some of the assumptions may not materialize or may differ materially from actual experience in the future.

Conference Call

Richard Baker, HBC’s Governor and Chief Executive Officer, and Paul Beesley, HBC’s Chief Financial Officer, will discuss the refinancing during a conference call on November 24, 2014 at 9:00 am EST. The conference call will be accessible by calling the participant operator assisted toll-free dial-in number (877) 852-2926 or international dial-in number (253) 237-1123. A live webcast of the conference call will be accessible on HBC's website at: http://investor.hbc.com/events.cfm. The audio replay also will be available via this link.

About Hudson’s Bay Company

Hudson's Bay Company, founded in 1670, is North America's longest continually operated company. Today, HBC offers customers a range of retailing categories and shopping experiences primarily in the United States and Canada. Our leading banners – Hudson's Bay, Lord & Taylor, Saks Fifth Avenue and Saks Fifth Avenue OFF 5TH – offer a compelling assortment of apparel, accessories, shoes, beauty and home merchandise. Hudson’s Bay is Canada's most prominent department store with 90 full-line locations, one outlet store and thebay.com. Lord & Taylor operates 50 full-line locations primarily in the northeastern and mid-Atlantic U.S., four Lord & Taylor outlet locations and lordandtaylor.com. Saks Fifth Avenue, one of the world's pre-eminent luxury specialty retailers, comprises 39 U.S. stores, five international licensed stores and saks.com. OFF 5TH offers value-oriented merchandise through 80 U.S. stores and saksoff5th.com. Home Outfitters is Canada's largest kitchen, bed and bath specialty superstore with 69 locations. Hudson’s Bay Company trades on the Toronto Stock Exchange under the symbol “HBC”.

Forward-Looking Statements

Information in this press release that is not current or historical factual information may constitute forward-looking information, including future-oriented financial information and financial outlooks, within the meaning of securities laws. This information is based on certain assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While the Company considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking information is subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what the Company currently expects. These risks, uncertainties and other factors include, but are not limited to: credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, interest rates or tax rates, the timing and market acceptance of future products, competition in the Company’s markets, the growth of certain business categories and market segments and the willingness of customers to shop at the Company’s stores, the Company’s margins and sales and those of the Company’s competitors, the Company’s reliance on customers, risks and uncertainties relating to information management, technology, supply chain, product safety, changes in law, regulations, competition, seasonality, commodity price and business disruption, the Company’s relationships with suppliers and manufacturers, changes to existing accounting pronouncements, the ability of the Company to successfully implement its strategic initiatives, changes in consumer spending, managing our portfolio of brands and our merchandising mix, seasonal weather patterns, economic, social, and political instability in jurisdictions where suppliers are located, increased shipping costs, potential transportation delays and interruptions, the risk of damage to the reputation of brands promoted by the Company and the cost of store network expansion and retrofits, compliance costs associated with environmental laws and regulations, fluctuations in currency and exchange rates, commodity prices, the Company’s ability to maintain good relations with its employees, changes in the law or regulations regarding the environment or other environmental liabilities, the Company’s capital structure, funding strategy, cost management programs and share price, the Company’s ability to integrate acquisitions and the Company’s ability to protect its intellectual property.

For more information on these risks, uncertainties and other factors the reader should refer to the Company’s filings with the securities regulatory authorities, including the Company’s annual information form dated May 2, 2014, which is available on SEDAR at www.sedar.com. To the extent any forward-looking information in this press release constitutes future-oriented financial information or financial outlooks, within the meaning of securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information and financial outlooks, as with forward-looking information generally, are based on assumptions and subject to risks, uncertainties and other factors. Actual results may differ materially from what the Company currently expects. Other than as required under securities laws, the Company does not undertake to update any forward-looking information at any particular time. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. All forward-looking information contained in this press release is expressly qualified in its entirety by this cautionary statement.