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Is Liquidation the Next Step for Lord & Taylor?

The official word from NRDC Equity Partners, which agreed to buy Lord & Taylor for $1.2 billion last week, is that it will give the storied chain a badly needed makeover and move it back upscale. But, the word on the street in the retail business is that the joint venture between National Realty & Development Corp. and Apollo Real Estate Advisors is sure to dismantle the 48-store chain.

“These are real estate people and that’s why they are in this transaction,” says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York-based retail consulting and investment firm. “Lord & Taylor as a name is dead. It died 15 years ago.” Indeed, the 180-year-old chain had been in decline for decades under the May Company, and Federated Department Stores began shopping Lord & Taylor four months after closing its merger with May last summer.

Davidowitz believes that NRDC will close anywhere from five to seven stores within the next 12 months and will ultimately liquidate Lord & Taylor assets. The crown jewel is the 611,000-square-foot New York flagship on Fifth Ave., which could be redeveloped into a mixed-use project akin to the Bloomberg Tower or Time Warner Center. Davidowitz estimates that the value of that property alone is $300 to $350 million—about one-fourth of the total deal cost.

On the record, NRDC President Richard A. Baker has said that the joint venture plans to continue operating the chain and has no plans to close any of the locations in the near future. Last Thursday’s issue of the Chicago-Sun Times, however, reported that American Girl, which has a 40,000-square-foot store at 11 E. Chicago Ave., may already be negotiating to lease a 47,000-square-foot piece of the 141,000-square-foot Lord & Taylor store at Water Tower Place on Michigan Ave. NRDC and American Girl did not return calls seeking comment.

Despite talk of reviving the Lord & Taylor franchise, retailing experts figure that the onetime fashion trendsetter has fallen too far behind Bloomingdale’s, Nordstrom and Neiman Marcus to ever catch up.
Indeed, no retailers were among the bidders when Federated put it on the block. But a number of real estate companies that have experience in retail takeovers did, including Kimco Realty Corp. and, reportedly, Macklowe Properties. NRDC Equity Partners also has a track record in this area, having purchased Linens ‘n Things for $1.3 billion in February.

Lord & Taylor stores are located primarily in the Northeast and Midwest. The majority of the stores are between 114,000 square feet and 150,000 square feet.

“I think reviving Lord & Taylor is out of the question. It’s not even on the table,” Davidowitz says. “In many cases, the developer has the say in what you can or can’t do, so it’s going to take a long time and a lot of negotiation to work out what the real estate value is. … You’ve got some developers who would like nothing better than to get that space back, but if you say ‘We’d like to close,’ you’ve got no leverage.”

Davidowitz cites the example of the Alexander’s Department Store site on 59th Street and Lexington Avenue in New York City. Vornado Realty Trust sat on the site for nine years biding its time for the right opportunity. Before signing an agreement with Bloomberg to build a 1.25 million-square-foot office tower on the site in the spring of 2001, Roth was rumored to brag to colleagues that the property increased in value every day he failed to lease it.

In the case of Lord & Taylor, however, a gradual shutdown is more likely. “It wouldn’t make sense for them to close the company right now because they would be left with empty buildings,” says Peter Borzak, a principal with Illinois-based Pine Tree Commercial Realty, a retail development firm. “But I think that when you have two real estate companies joining forces to buy a retailer, their interest is in real estate. They must have some ideas on adding value through leasehold interest or ownership.”

Borzak doesn’t think that NRDC will necessarily put Lord & Taylor out of operation somewhere down the road. He believes that profitable sale-leaseback arrangements are also possible.

“They may not close all of the [stores down], there could be other ways to make money,” he notes.

– Elaine Misonzhnik
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