Nobody Likes Losing an Anchor Renter but Toys R United States Closures Likely To Produce More Upside than Down
Plant San Jose The announcement from Toys R Us last week that it will initially be closing up to 182 stores by April could end up being a favorable for much of the property managers affected.
A considerable, if not majority, of the properties are located in strong retail trade locations with attractive shopping demographics. In addition, retail properties near or in the shopping mall with shops slated for closure that are funded by openly held loans in business home mortgage backed securities (CMBS) have actually been reporting strong financial results.
As part of its September 2017 Chapter 11 personal bankruptcy reorganization filings, Toys ‘R United States announced recently it planned to close 182 shops, around one-fifth of all of its U.S. shops. While mass store closure statements normally develop angst among CMBS investors, upon additional analysis the closures may really produce more upside than down, inning accordance with John Vecchione, director of CoStar Risk Analytics.
Vecchione found that, while the overall CMBS loan exposure to Toys R United States is $20 billion, the recent closure statements will affect only about $2 billion in CMBS loans. When CoStar’s Area Quality Rating is applied to this collateral, it revealed that places backed by just $400 countless the CMBS loans was located in bad trade locations with a greater threat of replacing Toys R Us with a lower renter, or not having the ability to fill the space at all.
CoStar’s exclusive Location Quality Score (LQS) uses multiple variables, including trade location incomes, retail density and market competitors to assess the performance of more than 1.5 million retail properties in the CoStar database.
The CoStar LQS can provide insight regarding whether the shop closure is called for by a location in a poor trade location, or whether it remains in a trade area most likely to support a different retail user.
Toys R Us and Infants R United States have an average LQS of 70 (from 100), which remains in line with the score for the average U.S. shopping center. By way of comparison, among Toys R United States’ main competitors, Walmart, has a shop portfolio where the average LQS is more detailed to 58.
“In figuring out the full CMBS loan exposure to Toys R Us, we broadened our research study beyond the leading 5 renters provided in standard CMBS reporting. Using CoStar’s renter research, we were able to put together a much more detailed list of CMBS loans either directly or indirectly exposed to Toys R United States,” Vecchione stated. “In the end we were shocked that the majority of CMBS loans exposed to Toys R United States might potentially benefit from the closings.”
One such home is The Plant, a 485,895-square-foot shopping center in San Jose. Toys R Us/Babies R Us is the 2nd biggest renter inhabiting 64,850 square feet under a lease with a January 2023 lease expiration.
The center has been posting strong monetary outcomes at 93% occupancy and net operating income through the very first 9 months of 2017 of $9.98 million – sufficient NOI to cover its overall financial obligation payment amounts more than two times, according to the latest bondholders’ report from last month.
At Pipeline Village East and West in Hurst, TX, Toys R United States runs both a Toys R United States and Children R Us shop occupying 60% of the 132,529 rentable square feet. Toys R Us is closing the 30,790-square-foot Infants R United States however keeping open its 49,210-square-foot Toys R Us, which it reported is profitable and in reality in the leading 25% of its shops in the region, according to the current shareholders’ report from last month.
Babies R Us, in fact, comprise more than half of the shops Toys R United States revealed it is closing, a disproportionate share since the brand name accounts for almost one-fourth of its U.S. shop portfolio.
CoStar Risk Analytics shows the Pipeline Village property will most likely discover an occupant however at a lower rent.
Toys R United States is working with A&G Real estate Partners to evaluate its leases and has till mid-April to continue its review of its portfolio of more than 790 U.S. stores. It has asked some property owners for a three-week extension to make a decision.
Emilio Amendola, co-president of A&G Real estate Partners did not get into specifics but informed CoStar that interest in Toys R United States homes “has actually been really strong.”
Other retail experts concur that most of locations being closed might offer upside to their property owners.
“The good news here is that almost all of the properties are Class A or B areas– both the shopping mall and metropolitan places– and solid realty,” said Garrick Brown, vice president – retail intelligence for Cushman & & Wakefield. “Toys R United States has, both in the shops they are keeping open and the ones allocated for closure, a great property portfolio.”
“The sizes of these shops differ however usually they are 40,000 square feet or less, which means that re-tenanting these areas will be a lot easier than if the footprints were bigger or if they were not within prime areas already.”
Brown stated he sees the prospective occupant swimming pool for this size box is relatively strong with these sites likely going to grocery, off-price garments or other mid to junior box users.
That said, Brown added, he would not be amazed if Toys R United States continues to close some locations as leases end and increasingly see them combining standalone Toys R Us and Children R Us stores under one roofing system. As part of its closure announcement, Toys R Us stated that will be the case in six of its planned shop closures.
Editor’s Note: To find which properties have the most upside or to learn more about CoStar Danger Analytics, contact John Vecchione, Director.