Primaris REIT (PMZ-UN-T) began planning for the bankruptcy of Hudson’s Bay Company (HBC) three years ago, and that advance strategizing should enable it to reap quicker rewards now that Canada’s oldest retailer has gone down.

Primaris chief executive officer Alex Avery told RENX that a group within the trust was created to model out and analyze different scenarios and their potential impacts on cash flow, capital costs and other factors.

As far back as two years ago, Primaris was in preliminary discussions with targeted retailers discussing which HBC locations they might be interested in, the rent they thought would work, and the amount of capital needed to invest by a single tenant to bring a store up to its standards.

Some of those talks are still ongoing.

“We’ve had other conversations where we've been advancing plans around creating more smaller box space, and one or two where we're still evaluating alternatives,” Avery explained.

Primaris controls five HBC leases

Primaris has just assumed control of five disclaimed HBC leases at:

• Cataraqui Centre in Kingston, Ont. (50 per cent ownership);
• Les Galeries de la Capitale in Quebec City;
• Medicine Hat Mall in Medicine Hat, Alta.;
• Place d’Orleans in Orleans, in the eastern part of Ottawa, (50 per cent ownership);
• and Sunridge Mall in Calgary.

“In these cases, what we found was that the Bay stores were worth more dead than they were alive,” Avery said, noting those stores generated about four dollars per square foot in net rents compared to $14 for the average large-format anchor tenant.

Primaris issued guidance on May 26 that said the disclaimer of these five store leases will result in: 532,100 square feet of vacancy; $5.5 million of lower annualized revenue; and $3.9 million of lower annualized net operating income.

Higher rents and stronger tenants are expected

While those facts might initially appear negative, the opposite appears to be true. While it’s too early to reveal plans about specific locations, Avery said: “I think you could characterize this as a great opportunity for landlords to invest in their properties, create new jobs, bring exciting new retailers to these properties, and reinvigorate a lot of these properties. 

“What we noticed in our malls was that over time, as the HBC situation worsened and their balance sheet weakened, they invested less into the business and it showed in the stores. We noticed a decline in foot traffic going into and coming out of the HBC stores, and that tended to impact tenants that were adjacent to the HBC stores -- to the point where some tenants were asking to move to other locations in the mall. 

“So we can reinvest and replace the low rent that was coming from HBC with a better retailer that drives more foot traffic, and that also provides a higher volume of shoppers for the retail units adjacent to the anchor box.

“We have other scenarios where we can re-devise the box into a number of smaller units that generate a much higher rent.”

Land will be freed for other uses

Across these five properties, comprising 252 acres of land, Primaris has been relieved of HBC lease obligations for: 1,866 parking spaces covering 13 acres; and restrictions across approximately 71 acres that precluded construction of any buildings on large portions of the sites, including the nine acres occupied by HBC stores.

“We have more than enough parking at pretty much every one of our malls and, now that the Bay leases are no longer an impediment to surfacing some of that value, we've got lots of opportunities to sever and entitle parcels of land for developers to build apartment buildings, hotels and seniors housing on,” Avery said.

“We can build restaurants and bank pads and similar retail uses in these vacant parking lots, all of which drives more traffic to the shopping centre. That creates a positive feedback loop where you bring in more exciting retailers, you bring in more customers and it creates a positive synergy.” 

In some cases, Avery said it could possibly make more sense to tear down a former HBC store and create value for that space in other ways. That’s what Primaris is doing at Devonshire Mall in Windsor, Ont., where a former Sears store was demolished to make way for two large-format retail tenants and the revitalization of a hallway within the mall.

Ruby Liu acquired leases for HBC stores at four Primaris malls

Ruby Liu Commercial Investment Corp. acquired 28 HBC lease locations across Canada, including four at Primaris-owned:

• Conestoga Mall in Waterloo, Ont.;
• Orchard Park Shopping Centre in Kelowna, B.C.;
• Oshawa Centre in Oshawa, Ont.;
• and Southgate Centre in Edmonton (50 per cent ownership).

Those four locations total 498,770 square feet of gross leasable area and approximately $5.4 million of gross rental revenue per year.

“We have done a lot of work trying to understand what the opportunity is from our landlord perspective and, like any any other business deal, you need to find a resolution that works,” Avery said.

He didn’t want to comment specifically on those stores because there are still too many unknowns about Ruby Liu's plans.

Strong demand from retailers 

Avery believes other retail landlords can also benefit from the demise of HBC.

“If you look at the results that get published by RioCan, First Capital, SmartCentres, Crombie, Choice, CT and ourselves, there's clearly strong demand from retailers,” Avery said. 

“There's not a lot of retail space available in Canada so, when you have a tight market, it's easier to get things done and get them done quickly because everyone is acting with a sense of urgency. 

“From a Primaris perspective, we expect a favourable outcome. We believe it will be a faster resolution than what we experienced with Target and Sears because of that robust market backdrop, but also with the hindsight of having navigated Target and Sears in the past.

"And HBC is smaller than both in terms of the impact on our portfolio.”