Hudson's Bay Shakes Up Canadian Retail Real Estate Fundamentals

In this commentary, we review the potential impact of Hudson's Bay Company's (HBC) recent plan to liquidate all but six of its 96 stores across Canada on the credit ratings of our Canadian retail real estate entities. While the anticipated store closures are expected to have a modest negative short-term impact on rated issuers, we note that factors such as low levels of HBC tenant concentration and a track record of dealing with big box vacancies could help mitigate the impact. Additionally, we acknowledge potential upside opportunities following potential positive re-leasing spreads driven by (1) HBC's relatively low in-place rental rates and rental recoveries, (2) rated issuers' well-positioned assets, and (3) the current strong market dynamics across the retail sector.

Key Highlights:
-- Our rated issuers have modest exposure to HBC, with rental revenue concentration as a percentage of total rental revenue ranging from 0.33% to 3.40% (average exposure of 1.85%).
-- Our rated issuers have managed significant store closures from major operators, demonstrating the ability to efficiently re-lease or repurpose vacated space.
-- We acknowledge potential upside opportunities in the long term thanks to anticipated rental rate growth, driven by HBC's relatively low in-place rental rates and rental recoveries, strong defensible locations and asset quality, and the strong market dynamics across the retail sector.

"While the anticipated HBC closures are expected to leave a modest impact in the short term, we believe our rated retail-focused issuers are well-experienced and benefit from low levels of HBC tenant exposure. Additionally, we acknowledge potential upside opportunities given anticipated positive re-leasing spreads," said Martin Lamas, Senior Analyst, North American Corporate Real Estate Ratings.