Toys “R” Us’ bankruptcy filing is triggering scrutiny of the so-called “dark value” of the real estate collateral backing the USD 512m TRU 2016-TOYS, as the recent wave of retail bankruptcies casts doubt on the feasibility of quickly re-leasing any closed stores, according to an investor, a retail real estate consultant and an analyst.
“Do they have enough value in the boxes to enable bondholders to get repaid should they go dark?” asked the investor. “I wouldn’t be happy if I owned it.”
Investor jitters over the outlook for Toys “R” Us were evident when the deal’s AAA rated bonds priced at L+ 225bps, about 50bps wide of initial talk, in October, as reported (see story, 25 October). The SASB is backed by 123 Toys “R” Us and Babies “R” Us in 29 states. The portfolio’s occupancy was 100% in April. The company said today that its approximately 1,600 stores around the world are continuing to operate as usual.
When the bond was issued last year, Standard & Poor’s pegged its portfolio’s “dark value” at USD 521m, and its “lit” value at USD 649.89m, according to a 13 October report. S&P noted that the dark value estimate accounted for lost rents, carrying costs and re-tenanting costs associated with a scenario in which Toys “R” Us defaulted on its master lease and vacated the stores.
The estimated USD 521m value embedded in the real estate is “reasonable,” at about USD 100 per sq ft, the retail consultant said. The trick will be finding new tenants in a retail market that has been battered by store closures.
“Is [the dark value] so high that it’s laughable, no, but it’s not that low that you wouldn’t lose some amount of sleep over it,” said the consultant. “The demand is not there right at the moment.”
While the presale noted that Toys “R” Us faced strong headwinds from online and other retailers, the deal’s strengths included the fact that 30.9% of its properties were in primary markets and that the structure holds the borrower responsible for expenses that would typically result in shortfalls to bondholders, according to the presale.
To date, a worst-case scenario of mass store closures seems unlikely as the company has indicated that the majority of its stores are profitable, the analyst said. “So there’s some comfort there — since companies typically don’t close profitable stores,” he said.
The TRU 2016-TOYS deal has the most exposure to the retailer of approximately USD 3.6bn in CMBS exposed to Toys “R” Us, according an 11 September Morningstar report. Default risk in TRU is mitigated by the fact that the loan is backed by stores with geographic diversity. In addition, the loan has a low loan-to-value ratio of 58.3% based on the appraised value of USD 878.8m at issuance. The floating-rate credit has an initial maturity date in 2019 and a final maturity date in 2021, according to the report.
Among the loans held outside the TRU deal, a number are located in solid markets. These include the Bronx Terminal Market Loan, which is backed by a retail property less than a mile from Yankee stadium, according to Morningstar. The USD 380m loan has three pari passu pieces in COMM 2014-CR17, COMM 2014-CR18 and COMM 2014-UBS3.
However, loans in areas struggling with store closures could be more at risk, according to Morningstar. These include the USD 85m Louis Joliet Mall loan that makes up 8.8% of UBSBB 2012-C2, which is backed by property located in Joliet, Illinois, the report said.
Click here for a list of top CMBS property loans with exposure to Toys “R” Us.