NEW YORK CITY—Hudson's Bay Company has announced plans for a$1.25 billion, 20-year, interest only mortgage on the groundportion of its Saks Fifth Avenue flagship store at 611 5th Ave. Thetransaction is expected to close in early December.

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An independent appraiser valued the entire property at $3.7billion based on the assumption that the entire property is netleased by Saks Fifth Avenue at an estimated current fair marketrent.Morgan Stanley Bank, Goldman Sachs Mortgage Co. and the Bankof Nova Scotia, independently commissioned a leading internationalappraiser to provide appraisals of the land and thebuilding.

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In a conference call regarding the mortgage, governor and CEORichard Baker said, “As we worked to advance and realize value fromour real estate portfolio, it became obvious to us that thisproperty is unique and should be treated differently than our otherproperties.”

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He continued, “A $250 million renovation of the store that willstart in the first half of 2015 is intended to significantlyenhance the store's productivity and EBITDA, which we believe willsignificantly grow the value of the asset.”

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Further, says Baker, “This mortgage transaction allows us tocapitalize on the value of this asset today, but also providesstructural flexibility to capture additional value creation in thefuture.”

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All proceeds from the financing, net of associated cashexpenses, will be used to permanently pay down approximately $1.2billion of HBC's first lien term loan, which currently bearsinterest at a floating rate of 4.75% and matures in 2020.

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With an expected fixed interest rate of less than 4.40% on theSaks ground mortgage, this transaction will result in a reductionto annualized cash interest expense of at least $5 million (inCanadian dollars).

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The Saks ground mortgage is interest-only and does not requireany principal amortization over its 20 year term. The transactionwill result in approximately $76 million of one-time expenses,including about $33 million that are non-cash and will be reflectedin finance costs in the fourth quarter of fiscal 2014.

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The remaining $43 million of expenses, which includes a mortgagerecording tax of US$35 million, are expected to be capitalized andamortized as finance costs over the term of the loan.

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Following this transaction, approximately 80% of HBC's debt willbe backed by high-quality real estate, inventory and receivables,allowing it to benefit from attractive debt pricing, with limitedor no recourse to HBC's other retail operations.

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Additionally, the company's capital structure is greatlyenhanced through securing 20 year money. Prior to this transaction,the weighted-average term to maturity of HBC's funded debt was 5.3years compared to 11.5 years pro forma this transaction.

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Rayna Katz

Rayna Katz is a seasoned business journalist whose extensive experience includes coverage of the lodging sector, travel and the culinary space. She was most recently content director for a business-to-business publisher, overseeing four publications. While at Meeting News, a travel trade publication, she received a Best Reporting award for a story on meeting cancellations in New Orleans during Hurricane Katrina.