“Corporate shell game”: Special servicer says Hudson’s Bay undermined $850M loan

Hudson’s Bay CEO Richard Baker (Credit: Getty; iStock)

Hudson’s Bay CEO Richard Baker (Credit: Getty; iStock)

The special servicer for an $850 million CMBS deal has accused Hudson’s Bay Company of engaging in a “clandestine corporate shell game” as it took the department store operator private, a move that undermined the creditworthiness of the loan, which now faces default. And as with many other real estate-related court cases lately, Covid-19 is a focus.

The CMBS loan provided by JPMorgan Chase, Bank of America, and Column Financial is secured by 24 Lord & Taylor stores and 10 Saks Fifth Avenue stores across 15 states. As the parent company of both brands at the time, Hudson’s Bay was the tenant at all 34 stores and a partial landlord through a joint venture with mall operator Simon Property Group.

Hudson’s Bay was also the guarantor of rent payments at the stores. But over the past several months, the now-private company “engaged in deliberate and concealed corporate restructurings that stripped assets” from the original parent company and “transferred them to newly formed, foreign entities,” special servicer Situs claimed in its federal lawsuit against Hudson’s Bay. That alleged action violated “loan documents and related guarantees,” according to the complaint, filed Monday in New York on behalf of the CMBS trust.

The suit also accuses Hudson’s Bay of improperly using the coronavirus as an excuse for not addressing concerns about the asset transfer, which it called “an opportunity to try to smokescreen their numerous breaches of their obligations.” A number of real estate-related lawsuits have emerged in recent weeks that allege defendants improperly use Covid-19 as an excuse to break off signed deals or terminate leases. In late February, Hudson’s Bay shareholders approved the move to take the company private in what was seen months earlier as a $1.3 billion deal.

Hudson’s Bay said it rejects the lawsuit’s accusations. In a statement, a company spokesperson said the Simon Property joint venture was the loan borrower while Hudson’s Bay was “simply a guarantor of lease obligations” under the terms of the joint venture. “To suggest that HBC has violated any loan document provisions is categorically false,” the spokesperson added.

“Empty shell”
Situs claims to have only discovered the alleged scheme in April after Hudson’s Bay fell behind on rent payments. Following negotiations to address the shortfall, Situs says it was informed that a signature block on a document had to be changed because Hudson’s Bay Company, the entity that guaranteed rent payments, no longer existed.

In its place, the lawsuit says, was “an empty shell” called Hudson’s Bay Company ULC, all of whose assets and liabilities had been transferred to a Bermuda-based limited partnership whose general partner is controlled by Hudson’s Bay CEO Richard Baker, and whose limited partners include the Abu Dhabi Investment Council.

Situs says that these transfers were improper because loan documents required the CMBS trust to approve of — or at least be informed of — the transactions. Hudson’s Bay, for its part, says the restructuring was “driven entirely by tax considerations” and that the servicer’s concerns are “irrelevant distractions,” according to correspondence included in the lawsuit.

But Situs claims “defendants simply do not have the right to deliberately and secretly violate the contractual restrictions on such corporate maneuvers and then, when caught, declare it to be all fine.”

Situs did not respond to a request for comment.

The CMBS loan was transferred to special servicing on April 23, “due to the borrower’s failure to make the April debt service payment,” according to servicer commentary provided to Trepp.

The special servicer is now seeking a declaratory judgment to void the allegedly improper transfers, a temporary restraining order to prohibit Hudson’s Bay from engaging in additional restructurings and transfers, and an order expediting discovery for documentation of the transfers.

Situs pointed to reports that Lord & Taylor may liquidate its stores upon reopening following coronavirus-related shutdowns nationwide, and that Hudson’s Bay may attempt to acquire bankrupt rival Neiman Marcus.

Hudson’s Bay sold Lord & Taylor to clothing rental service Le Tote last August for $100 million, but remains the guarantor for rent payments at the Lord & Taylor properties in the loan portfolio.

Locations of the 34 stores included in the CMBS deal. Source: Trepp

Locations of the 34 stores included in the CMBS deal. Source: Trepp

Hotel CMBS loans worth $2B fall into special servicing

Courtyard by Marriott Boston Downtown. Homewood Suites Chicago and Sheraton San Jose Hotel (Credit: Google Maps)

Courtyard by Marriott Boston Downtown. Homewood Suites Chicago and Sheraton San Jose Hotel (Credit: Google Maps)

As the coronavirus roils the commercial-mortgage backed security market, loans on hotel properties have been ahead of the curve when it comes to delinquencies and special servicing.

Three massive CMBS hotel portfolio loans, covering 186 hotels with a total outstanding balance of about $2 billion, were among the largest to be transferred into special servicing so far this month, Commercial Observer reported citing Trepp. Single-borrower transactions backed by only hotels have been the hardest hit of all.

“Of the top 24 loans that were sent to special servicing with the April remittance cycle to date, all but three have been hotel loans,” Trepp analysts wrote in a Thursday update.

The three big portfolio loans are all of recent vintage, having been originated in 2018 and 2019.

The most recent was a $752 million loan on the 92-hotel HIT portfolio, which included Homewood Suites Chicago Downtown and the Residence Inn Los Angeles-El Segundo among other properties. A Morgan Stanley-led group originated the loan last May, and more than a dozen of the hotels in the portfolio have already been paid off. But the debt backed by the remaining hotels in the deal was moved to special servicing due to “imminent monetary default.”

The servicer on another deal, the Tharaldson Hotel portfolio loan, provided more detailed commentary. The borrower, Tom Barrack’s Colony Capital, had requested a 90-day deferral for debt payment as well as suspension of various deposits and other accommodations, which the master servicer could not provide. The $777 million loan covered 135 hotels at issuance in 2018, about a third of which have since been released since.

Colony, formerly a junior mezzanine lender on the Tharaldson portfolio, had gained control of the hotels — mostly in California, Nevada and Texas — in 2017 when the previous borrower failed to secure refinancing.

Finally, a $720 million loan on the Ashford Highland portfolio was also put into special servicing, but no detailed commentary was provided.

Last month, Kroll Bond Rating Agency assigned a “Underperform” outlook to all single-asset single-borrower lodging deals that it was tracking — including the Tharaldson portfolio — citing a likely decline in occupancy to around 10 percent as had been the case in China and Italy.

Occupancy at U.S. hotels fell to 21 percent during the week ending April 11, according to the hospitality data firm STR. That’s a 70 percent drop from a year ago.

“If occupancy levels among KBRA-rated CMBS SASB lodging properties fall to this level for an extended period, none would be able to achieve breakeven debt service coverage,” Kroll analysts wrote. [CO]Kevin Sun

(Caption: top to bottom: the HIT, Tharaldson, and Ashford Highland portfolios. Source: Trepp)

(Caption: top to bottom: the HIT, Tharaldson, and Ashford Highland portfolios. Source: Trepp)

Blackstone’s Jonathan Gray bearish on CRE

Jonathan Gray of Blackstone
From the New York website: Jonathan Gray, the Blackstone Group’s head of real estate, recently joined the chorus of investors and analysts warning of an impending slowdown in the commercial property market.
While the national multifamily market remains strong, global volatility is slowing down financing through commercial mortgage-backed securities (CMBS) and reducing rates of return on commercial real estate, Gray said at the University of Texas Investment Management Company in Austin on Friday.
“Rates of return are definitely coming down,” he said, according to Bloomberg, because the property cycle is “much more mature.”
Persistently-low oil prices and economic volatility in China, Russia and Latin America have led to a slowdown in the creation of commercial mortgage-backed securities, as The Real Deal recently reported.
“It’s very difficult” to do securitizations today, Gray said, according to Bloomberg.
Blackstone’s massive rental portfolio, on the other hand, is doing fine, Gray said. The company’s Invitation Homes unit, which owns 50,000 single-family rental homes in the U.S., has seen 97 percent occupancy and rent gains of 5 percent per year.
The Real Deal profiled Jonathan Gray and Blackstone’s real estate business in depth back in August. [Bloomberg] – Ariel Stulberg

Source: The Real Deal Miami