U.S. real estate tycoon Richard Baker is proving the naysayers wrong again.

He bought the struggling Hudson's Bay Co. for about $1.1-billion in 2008 despite warnings that the retailer was a basket case, then sold most of the real estate of HBC's troubled Zellers chain to U.S. discounter Target Corp. for even more – $1.8-billion.

On Monday, Mr. Baker made another surprise move, announcing HBC's $650-million deal to sell its flagship downtown Toronto store and adjacent office tower to landlord Cadillac Fairview Corp.

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HBC will lease the retail and office complex back, and open its first Saks Fifth store in Canada at that location – connected to Cadillac's Toronto Eaton Centre and alongside its current Hudson's Bay store. The moves come just a few months after HBC bought U.S. luxury department store chain Saks Inc. for $2.4-billion.

The Queen Street Hudson's Bay building is a landmark in downtown Toronto, a shopping destination for decades, including when it was a popular Simpsons department store.

It runs the upscale The Room fashion shop and has added a British Topshop and other prominent brands over the past few years.

Mr. Baker's decision to launch Saks at the Queen Street store is a reversal of his earlier plan to roll out the country's first Saks at its HBC store on Toronto's Bloor Street. The move underscores HBC's interest in capitalizing on its real estate holdings.

"The fact that we're able to generate value on the edges is good for our operating businesses because it gives us a chance to pay down our debt and reinvest in our stores," Mr. Baker said in an interview.

The latest deal shows Mr. Baker can find value in HBC where most didn't see it.

Some may have seen HBC as "a lump of coal," said Derek Warren, portfolio manager at real estate company Morguard Corp., but "apparently there's a bit of a diamond there."

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John Sullivan, chief executive officer of Cadillac Fairview Corp., said he convinced Mr. Baker to locate Saks at the Queen Street West store, and credited the HBC CEO for re-energizing the once deeply troubled retailer that others had abandoned.

"I think he's just getting going," Mr. Sullivan said. "Quite frankly, this is as much a bet on Richard as on anybody or anything."

Mr. Sullivan said he approached Mr. Baker in early December after The Globe and Mail published an article in its Report on Business Magazine saying he had chosen the Bloor Street location for its first Saks store in Canada. It took Mr. Baker just one or two days to get back to him and agree to the idea, Mr. Sullivan said.

Mr. Baker's vision to bring the upscale Saks to Canada – and shift Hudson's Bay higher end – fits into Mr. Sullivan's vision to bring more luxury retail to the Toronto Eaton Centre, which Saks and Hudson's Bay will now officially become part of, including an upgraded bridge between the buildings. Cadillac Fairview announced this month it has a deal with U.S. department store chain Nordstrom Inc. to take most of the space being vacated by struggling Sears Canada Inc., setting the stage for a luxury battle. Mr. Sullivan said he will look for other upscale retailers to lease space in the mall.

The company said it plans a multilevel Saks store that will be shared with the current Hudson's Bay. The Bay will occupy most of the space but the stores will have separate entrances. Proceeds of the transaction will be used to reduce the company's debt and invest in growth initiatives, it said.

The deal also includes a Saks store in Cadillac Fairview's Sherway Gardens mall in Toronto. Both it and the Queen Street Saks store will run an upscale "food hall" modelled on the one at British department store icon Harrods, Mr. Baker said. He added that he no longer plans to convert the Bay store on Bloor Street to Saks. Saks at Queen Street is scheduled to launch in the fall of 2015 and, at Sherway, in the spring of 2016.

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Mr. Baker said HBC still plans to spin off its real estate into a real estate investment trust, and the latest deal gives investors a road map to understand the property values. He said the Queen Street store's rent will be $25 a square foot.

Hermann Kircher of retail real estate consultant Kircher Research industry said investors still want to see an HBC REIT, although it may become less valuable if Mr. Baker sells off more of its lucrative properties, including its crown jewel – the Saks Fifth Avenue store in New York.

"But the results have proven he's a smart investor," Mr. Kircher added. "Hopefully he's going to be a smart retailer too."