NEW YORK, United States — In 2006, when real estate developer Richard Baker bought department store Lord & Taylor for about $1.2 billion, its most coveted asset was a 12-floor building on Fifth Avenue in Manhattan that houses the now-191-year-old retailer's 676,000-square-foot flagship.

A little over a decade later, Baker — governor, executive chairman and interim CEO of retail-real estate portfolio Hudson’s Bay Company —  is cashing in on that investment. He's selling the building for $850 million to WeWork — a venture capital-backed company that subleases square footage in its buildings to early-stage startups looking for semi-affordable office spaces — via WeWork Property Advisors, a joint venture with private equity firm Rhône Capital.

In August 2017, WeWork confirmed a $4.4 billion investment from Softbank that valued the “new-age real estate firm” at more than $20 billion, allowing for such grand purchases.

Lord & Taylor will continue to lease space from WeWork — which will use the rest of its building for its own New York headquarters as well as a leased office space — although the size of the department store will shrink to 150,000 square feet.

The deal, which also includes a $500 million equity investment from WeWork Property Advisors, will allow Baker to reduce the company’s outstanding debt — and increase cash — by C$1.6 billion ($1.3 billion at current exchange), increasing total liquidity to C$1.1 billion ($870 million). It leaves HBC with C$385 million ($304 million) in cash on its balance sheet.

"This positions us as being one of the most financially secure department stores in the world and gives us the flexibility over time to be one of the winners in the department store space," Baker told BoF. "We have new ideas, new ways of doing things, very valuable real estate that we own and we have an excellent balance sheet.”

The deal offers several benefits to both HBC and WeWork. In addition to reducing its debt load, HBC hopes to capitalise on the foot traffic that a mix-used building can help generate. What's more, most of the people who use WeWork spaces are millennials, a demographic department stores have been unable to convert to loyal customers — due in no small part to the rise of e-commerce.

For its part, while it will own the Lord & Taylor building outright, WeWork also plans to leverage HBC’s portfolio across the United States, Canada and Europe, which includes Hudson's Bay, Lord & Taylor, Saks Fifth Avenue, Gilt, Saks Off Fifth, Germany’s Galeria Kaufhof and Belgium's Galeria INNO, amounting to 61 million square feet of real estate. It will establish shared workspaces alongside HBC's existing retail assets.

“This is a whole new chapter,” Baker said. “We’re going to have cross marketing between the WeWork members and our businesses and customers... making our department stores interesting and important parts of the community, and that’s what we’re after. That’s a really big part of this transaction and that was our primary goal.”

Partnering with WeWork will almost certainly increase foot traffic in HBC's stores. However, whether this will result in significant conversions is not yet proven. The Westfield World Trade Center in New York is highly trafficked, with 300,000 daily commuters and an influx of tourists, but has yet to provide stellar conversions according to retailers renting in the development. "Westfield World Trade Center is off to a good start and is going through a normal stabilisation period for a centre of its size," a spokesperson told BoF in October 2017. "As we have said in the past, we expect it to become one of the most productive retail centres in the US and internationally."

Zooming out beyond store-floor productivity, the partnership between HBC and WeWork Property Advisors can be seen as another step towards Baker’s not-so-secret goal of dominating the upscale retail-real estate market, both in the US and abroad.

The announcement comes on the heels of the news that HBC chief executive Jerry Storch will exit the company effective November 1, which suggests the likelihood of more strategic changes in the coming months.

In June 2017, the company announced an ambitious "Transformation Plan" to streamline back-of-house operations and save more than $350 million by the end of the 2018 fiscal year, cutting 2,000 jobs in the process. In the most recent quarter ending July 29, sales increased 1.2 percent to C$3.3 billion (about $2.6 billion). Adjusted EBITDAR (earnings before interest, taxes, depreciation, amortisation and rent or restructuring costs) was C$207 million (about $164 million), down from C$263 million (about $208 million) from the same period in 2016, while net loss was C$201 million (about $159 million).

What's next, then? While peeling off another valuable property isn't out of the question, it seems highly unlikely that HBC will let go of its Saks Fifth Avenue flagship, which sits roughly 10 blocks north of Lord & Taylor and was appraised at about $3.7 billion at the time HBC purchased it in 2013. However, as with the Lord & Taylor flagship, HBC could reduce the store sizes of certain properties to make way for the introduction of WeWork offices.

“The average Lord & Taylor store is 125,000 square feet. We know that 650,000 square feet for a premium department store in a middle of Manhattan is too big,” Baker said, referring to Lord & Taylor’s mid-market positioning. “Saks Fifth Avenue, just up the street and also 650,000 feet, is hugely productive and we only want more space there for retail because it’s a luxury retailer.”

“It all depends what store, what place, what situation,” Baker added. “But we’re activating and engaging on both online and in-store experience. We’re playing offense when other people are playing defense, and we’re making our stores more attractive, more interesting, more compelling in a landscape when other people are retreating.”

The $304 million in cash now sitting on HBC's balance sheet may also put Baker in the position to finally acquire the troubled Neiman Marcus Group, which the company has been in on-and-off talks to buy for at least a year. In June, the Dallas-based retailer, which also includes the highly coveted Bergdorf Goodman in Manhattan and luxury e-commerce player Mytheresa.com, announced that it had terminated discussions surrounding a sale of any kind. However, Neiman Marcus Group's value continues to shrink.

In its latest fiscal year ending July 29, NMG's revenues were $4.7 billion, a 5.2 percent decrease in sales at stores open at least one year. The 2017 net loss was $532 million — compared to $406 million in 2016 — with adjusted EBITDA (earnings before earnings before interest, tax, depreciation and amortisation) clocking in at $433.8 million, down from $584.9 million a year earlier.

However, its debt load remains a barrier, with long-term liabilities amounting to $6.4 billion at the end of last year. If Neiman Marcus manages to renegotiate its debt or is forced to file for bankruptcy, Baker may able to acquire it and its assets for a steal. The NMG acquisition would be more about category consolidation and less about real estate, though, as it does not own the most valuable property in its store portfolio: the main Bergdorf Goodman building and land, which remain under the ownership of the Goodman family.

Baker wouldn’t comment on his potential acquisition of Neiman Marcus Group, only saying that the WeWork deal “makes us a very strong financial player in the global department store space.”

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