August 2019

CRE Research

Retailers at Risk: How Long Will the Retailpocalypse Continue?

The so-called “retail apocalypse” showed no signs of wind- Shoesource – which was once the largest family-owned ing down in 2019, with its momentum fueled by leveraged US retail business – came to the decision to liquidate all stress from private equity ownership, dwindling sales from of its 2,700 locations by this June. Payless accounted for ecommerce’s growing influence, shifts in consumer tastes the overwhelming majority of scheduled store closures in and purchasing behavior, unfavorable leasing arrange- 2019, and its recent downfall puts it in the history books for ments, and continued efforts by brands to boost profitabil- the largest retail liquidation of all time by count. ity by rightsizing their physical portfolios. In terms of overall square footage, however, Coresight Re- Coresight Research estimates that approximately 7,500 US search notes that 2018 still marked a peak for new retail store closings have already been announced through July of vacancies since the past year saw the most significant big- 2019; a figure that already eclipses the total closure count box cutbacks from the likes of Sears, Kmart, Bon-Ton, and of 5,864 for full year 2018 by roughly 20%. The firm details Toys “R” Us. Costar projects that this resulted in 155 mil- that announced store closures could rise to 12,000 by the lion square feet of physical space that needed to be refilled. end of this year which would completely shatter 2017’s re- cord-breaking count of 8,139 liquidated storefronts. By comparison, the list of 2019’s year-to-date retail casual- ties primarily consists of specialty and niche players, mom Among the retailers with the largest brick-and-mortar foot- and pop shops, and regional chains with smaller parcels that prints being shuttered in the coming months include recent- have struggled to compete against the brand loyalty and dis- ly bankrupt or defunct chains such as Payless ShoeSource, count pricing advantages of Target and Walmart, as well as Charlotte Russe, Gymboree, and Dressbarn. Payless the convenience and accessibility of online shopping.

RETAILERS WITH LARGEST CMBS EXPOSURES TOTAL LOAN TOTAL EXPOSURE CMBS DEAL WITH TENANT/ANCHOR # OF DEALS # OF LOANS BALANCE BALANCE HIGHEST Forever 21 $19,527,174,481 $991,503,717 $146 $187 BMARK 2019-B12 Macys $18,471,450,918 $4,183,109,697 $133 $161 BMARK 2019-B12 JCPenney $17,523,519,561 $3,446,285,091 $199 $270 BMARK 2019-B12 H&M $12,103,218,077 $663,317,336 $111 $133 BANK 2018-BN14 Dick's Sporting Goods $11,823,003,274 $1,404,944,543 $173 $227 BMARK 2019-B12 $11,270,712,354 $1,693,067,009 $101 $111 BMARK 2018-B2 Ross Dress for Less $9,595,217,075 $1,131,982,269 $247 $361 COMM 2015-CR23 Old Navy $9,046,215,453 $712,658,920 $156 $182 GSMS 2012-ALOH Barnes and Noble $8,338,137,417 $560,476,932 $126 $146 BMARK 2018-B2 Burlington Coat Factory $7,479,515,161 $1,011,772,015 $143 $178 COMM 2015-CR23

Source: Trepp

*Total Loan Balance = Total loan balance backed by retailer *Exposure Balance = (current loan balance)*(percent occupied by retailer)*(allocated percentage of the loan backed by the property)

www.trepp.com 1 CRE Research August 2019

Major Retailer Headlines in 2019 Year-to-Date: remain in business. The big loan to footnote for CMBS investors is the $70.8 million loan (5.73% of DBUBS 2011- Barnes & Noble: In June 2019, private equity firm Elliot LC2A) secured by a 94,700 square-foot retail property Management won the bid to purchase Barnes & Noble built specifically to house its Chicago flagship. The Bar- and to assume the retailer’s underlying debt in a deal neys Chicago flagship is slated to close though its current worth $638 million via a $6.50 per share all-cash transac- lease ends in 2024. tion. (Book distributor ReaderLink had submitted an offer with a higher share price that was ultimately declined.) On a positive note, the Barney’s Madison Ave flagship – While investors can expect the continued business of which is the sole tenant at the 276,000 square-foot retail Barnes & Nobles in CMBS properties, there is a possi- property behind a $79.6 million CMBS loan – will remain bility that Elliot may move more aggressively to shutter open. The loan comprises 14.11% of GSMS 2010-C1 and stores or to modify the retailer’s current brand approach. matures in July 2020. The retailer also has non-top five An article from Quartz noted that newly appointed CEO tenant footprints at the Santa Monica Place retail center James Daunt hopes to execute a turnaround strategy in , which comprises a $300 million single-asset centered on drawing consumers into physical stores by deal, and the in , which operating them more like independents. CMBS exposure supports a $170 million loan split between two 2019 for the bookseller amounts to $11 billion across 123 deals deals. Both locations will be shuttered. and 102 properties. Some of the largest loans featuring Charming Charlie: Charming Charlie announced it will be Barnes & Noble as a major tenant include the $194.3 mil- going out of business in July 2017 shortly after its second lion mortgage behind the Lehigh Valley Mall in Whitehall, bankruptcy filing in less than two years. The firm will liq- (5.5% of collateral’s space) and the $133.3 uidate its entire 261 store footprint across 38 states by million loan secured by the in Humble, the end of August, noting that it could not come up with (4.5%). a plan to “ensure long-term profitability.” The retailer has Barney’s: A Times article released in July first a top five tenant lease at eight properties behind $1.26 shed light that luxury retailer Barneys was contemplat- billion in CMBS split across 11 deals (this total excludes ing a bankruptcy filing after the rent at its New York flag- Charming Charlie’s previously closed stores at the Wolf- ship was nearly doubled. The firm’s rent at its 660 Madi- chase Galleria in Tennessee and the Houma Crossing in son Avenue store was reset to a market level of $30 .) When you drill down to the allocated balance million in January from a previous rate of $16 million, of the properties leased to Charming Charlie for large which could make it more difficult for the retailer to sus- portfolio loan exposures, the overall intersection amounts tain its lease. At the time, the NYT piece reported that to about $256.7 million. The largest loans affected include “[t]he possibilities for Barneys include filing for Chapter the $50.8 million backed by the Shops at Norterra in Phoe- 11 bankruptcy protection, renegotiating leases -- not just nix, and the $24 million loan behind the Heritage of its Madison Avenue flagship, but potentially of other Square in Granger, , where the retailer currently branches in its 22-store network.” Barneys officially filed occupies about 12,000 square feet. for bankruptcy on August 6th and revealed it will be clos- Charlotte Russe: Charlotte Russe declared bankruptcy ing 15 of its 22 stores. in February 2019 and released an initial closure list af- Per court filings, the closure list consists of Barneys New fecting 94 locations. The young women’s apparel chain York locations in Chicago, Las Vegas, and Seattle while ramped up its downsizing plans one month later with the flagships in Manhattan, California, and Boston will a statement expressing that it was preparing to com-

www.trepp.com 2 CRE Research August 2019

mence going out of business sales at all 500 brick-and- the fourth or fifth-largest tenant with parcels averaging mortar stores if no buyer is found. The firm closed a about 8,000 square feet under leases expiring from 2019 quick turnaround deal in late March, announcing that it through 2027. About $1.07 billion in CMBS loans across had sold its intellectual property rights to Toronto-based 42 deals and 38 properties feature Dressbarn as top five YM Inc. In April, its new parent company announced tenant for a combined allocated balance of $742.3 mil- that the Charlotte Russe brand will see a revival with lion. The retailer is the largest tenant at The Shoppes at the re-opening of 100 stores and its online operations. Zion in St. George, , which backs a $22.3 million loan About $137.9 million across six deals and four proper- in WFCM 2016-NXS5 and the third-largest tenant at the ties are currently backed by the retailer. The largest loan Boca Park Marketplace in Las Vegas that secures a $45.1 impacted is the $32.8 million 1900 Bryant Street note million loan in WFCM 2015-SG1. (LSTAR 2017-5), where the retailer’s San Francisco store occupies 35.01% of the collateral’s space. Family Dollar: Dollar Tree – which had acquired its rival Family Dollar for $9.2 billion in 2015 – announced that Chico’s FAS: In January 2019, women’s clothing retailer it will close 390 stores in 2019 and convert another 200 Chico’s FAS announced that the firm was carrying out stores under its namesake banner. The retailer has a a strategic review of its operations to boost profitabil- sizable footprint in CMBS and is listed as a top five ten- ity and expand its online offerings. The firm is shutter- ant at 399 properties backing $3.49 billion split across ing at least 250 stores over the next three years across 166 deals. its namesake Chico’s, White House Black Market, and Soma nameplates. One of Chico’s brands is a top five Forever 21: As the fast fashion segment faces increased tenant behind $423.1 million in CMBS loans split across competition, word emerged in June 2019 that Forever 21 17 deals and 18 properties. is currently exploring restructuring options and has been in talks with private equity firm Apollo Global Manage- CVS: Following the release of its Q1 earnings report, CVS ment to line up debtor-in-possession funds if it were to announced that the retailer was slated to close 46 under- file for bankruptcy. The retailer is a top five tenant behind performing US stores as part of its corporate strategy to over $19.5 million in CMBS loans across 146 deals. focus on its healthcare services line. CVS is looking to expand its HealthHub pilot program and is working to fi- Fred’s Stores: Fred’s Inc. released several going-out-of- nalize a $69 billion merger with Aetna, pending federal ap- business lists for its 550-store footprint over the course of proval. Excluding two larger portfolio loans for which the the second quarter. The first batch of closures announced retail chain has a minor footprint, only two loans totaling in April affected 159 locations which overlapped with $218.0 million contain exposure to CVS stores from the $141.8 million across six deals, several of which were closure list. Overall, CVS has leases at nearly 500 prop- large portfolio loans. The discount retailer later ramped erties that collectively back $10.0 billion in CMBS debt up contraction plans by tacking on another group of 105 (many of which are large portfolio loans) across 273 deals stores in May and 49 stores in June to the closure list. By for a combined allocated balance of $4.28 billion. July, an additional 129 stores were on the chopping block, reducing the firm’s physical holdings to just 80 stores and Dressbarn: Ascena Retail Group Inc. announced the liqui- 166 pharmacies. The retailer is a top five tenant backing dation of all 650 stores under the Dressbarn banner as it $153.3 million in CMBS loans across nine deals and 14 shifts its focus on its more profitable brands Lane Bryant, properties. The most noteworthy exposure is the $9.7 Ann Taylor, and Loft. In terms of the retailer’s exposure million Fred’s Portfolio loan which is backed by a portfolio in CMBS properties, Dress Barn is frequently listed as of eight single-tenant Fred’s Pharmacy buildings (three

www.trepp.com 3 CRE Research August 2019

of the properties comprising the collateral have been “routinely hire[s] external advisors to evaluate opportuni- marked for closure). ties” and that it “has not hired any advisors to prepare for an in-court restructuring or bankruptcy.” While JCPen- The Gap: The Gap Inc. revealed that it will be liquidating ney notes that it does not have any financial concerns 230 stores of its namesake brand by 2020, more than half in the near-term, the retailer has been heavily monitored of which will close this year, after seeing a 7% decline in since it carries more than $4 billion in maturing debt and same-store sales at Gap locations. The company will also has accumulated over $1.7 billion in losses since 2014. Its be spinning off its best-performing Old Navy brand into current credit rating has also been downgraded to “junk” a separate, publicly traded entity. Gap stores currently status. The department chain is a top five tenant behind serve as a top five tenant at 65 properties behind $5.59 $17.5 billion in CMBS loans spanning 198 deals. JCPen- billion in CMBS loans across 77 deals. ney’s largest exposure in CMBS is the $1.2 billion mort- Gymboree: The children’s clothing retailer announced gage behind the 1.2 million-square-foot Aventura Mall in it was carrying out the chain liquidation of all of its 900 Aventura, where the retailer occupies 16% of the stores shortly after filing for bankruptcy for the second collateral’s space as the largest tenant. time in two years. Since Gymboree’s footprint is generally Lord & Taylor: Hudson’s Bay Company reported that it not big enough to represent a top five tenant, its over- was pursuing strategic alternatives for its Lord & Taylor all impact on CMBS is expected to be minimal. The only franchise, including a potential sale or merger. Known loan that appeared on our radar is the $17.7 million loan as the oldest department store in the US, the retailer re- entirely backed by the Gymboree Distribution Center in cently posted a double-digit decline in comp sales for the Dixon, California (UBSCM 2018-C9). first quarter across its 45 stores locations. Lord & Taylor General Nutrition Center (GNC): GNC’s CEO Ken Mar- serves as a collateral or non-collateral anchor at CMBS tindale told investors in July 2019 that the health and nu- properties backing $4.5 billion across 36 deals. The larg- trition chain was in the midst of finalizing plans to close est loan with exposure is the $152.3 million loan behind up to 900 stores by 2020, with the largest cuts expected the 1.1 million-square-foot Westfield Trumbull in Connecti- to come from its mall locations. This is estimated to slash cut, where the retailer occupies 10.43% of the shopping the retailer’s mall presence from 800 to just 400 to 500 center’s space. Lord & Taylor closed its Fifth Avenue Man- stores. GNC’s total exposure reaches $299.3 million in hattan flagship this January, which was designated as a CMBS across 23 deals and 27 locations for an allocated historic landmark, after selling the building to WeWork for balance of $100.9 million. In CMBS, the retailer mostly $850 million. occupies parcels averaging 1,621 square feet in smaller Lifeway Christian Resources: Nashville-based LifeWay convenience center and neighborhood centers. Christian Resources revealed it was closing all of its 170 JCPenney: An exclusive report by Reuters published in brick-and-mortar stores on March 2019 as it shifts its fo- July 2019 stated that JCPenney has “hired restructur- cus entirely to its digital distribution channels. The retail- ing advisors to explore debt restructuring options” in a er appears as a top five tenant behind $239.4 million in “high-stakes attempt to get its financial house in order,” CMBS debt across 11 deals. CMBS properties housing causing the firm’s stock to fall by more than 10% during Lifeway Christian secure an allocated balance of $158.4 early morning trading the following Monday. The depart- million. ment chain issued a counter statement, claiming that it

www.trepp.com 4 CRE Research August 2019

Modell’s: In March 2019, the Wall Street Journal reported While Shopko mainly operates in smaller neighborhood that Modell’s has hired restructuring adviser Berkeley Re- centers, grocery anchors tend to have a notable impact search Group to formulate a turnaround strategy and ex- in CMBS when they close since they typically occupy a amine bankruptcy options following sluggish sales from large portion of the overall collateral. (In Shopko’s case, big-box and online competition. Known as the oldest fam- the retailer often shows up as the sole tenant or occupies ily-owned sporting goods retailer, Modell’s is often listed more than 80% of the retail or industrial collateral square as the fourth or fifth-largest tenant at CMBS properties footage). The retailer is the largest tenant at 19 properties occupying 25,000 square feet or less, with total exposure behind $154.8 million in CMBS debt securitized across 13 reaching $1.33 billion across 16 deals and 11 properties. deals. This translates to 2.7 million square feet of space solely leased to the supermarket chain, the brunt of which Payless Shoesource: In February 2019, Payless Shoe- comes from the combined 1.7 million square feet of in- source announced it was gearing up to close its entire dustrial and retail space backing the $50 million Shopko 2,300 store portfolio shortly after it filed for bankruptcy Industrial Portfolio (4.53% of COMM 2015-CR25) and the protection for the second time. The retailer reported a $27.1 million Shopko Portfolio (2.65% of JPMDB loss of $63 million in fiscal year 2018 for its North Ameri- 2017-C5) loans. The two loans were recently sent to spe- can operations. Excluding large portfolio loans for which cial servicing in April. Payless only has a minor footprint, roughly $538.3 million in CMBS loans across 41 deals and 46 properties lists the Sears / Kmart: On August 6, 2019, it was announced shoe seller as a top five tenant. that 26 Sears and Kmart stores will be shuttering their doors in October 2019. Among the 26 stores expected Performance Bicycle: Parent company Advanced Sport to close later this year, we found that four of them touch Enterprises (ASE) announced it will be liquidating all of its CMBS loans (all as non-collateral anchors). Trepp will be 102 Performance Bicycle locations after filing for Chapter providing further data on these store closings in upcom- 11 bankruptcy in November 2018. The retailer serves as a ing research. top five tenant at eight retail centers behind $79.5 million in CMBS loans. The largest loans affected include those Topshop: London-based retail operator Arcadia Group backed by the North West Square in Columbus, OH and filed for Chapter 15 bankruptcy in late May and an- the Laguna Village property in Chandler, AZ. nounced that it was liquidating all 11 Topshop stores in the US. In June, Topshop closed its 22,000 square-foot Shopko: Shopko announced in March 2019 that it is liqui- in-line stores at two superregional malls affecting CMBS dating all 363 stores by the end of the summer after the loans: the $835 million loan secured by the 1.86 million- retailer failed to find a buyer for the chain. The firm had square-foot Fashion Show Mall in Las Vegas and the $1.2 filed for bankruptcy in January due to strong grocery mar- billion loan backed by the 1.2 million-square-foot Houston ket competition, citing assets of less than $1 billion and Galleria in Texas. liabilities of up to $10 billion as the reason for the filing.

For more information about Trepp’s commercial real estate data, contact [email protected]. For inquiries about the data analysis conducted in this research, contact [email protected] or 212-754-1010.

About Trepp Trepp, founded in 1979, is the leading provider of information, analytics and technology to the CMBS, commercial real estate and banking markets. Trepp provides primary and secondary market participants with the web-based tools and insight they need to increase their operational efficiencies, information transparency and investment performance. From its offices in New York, San Francisco and London, Trepp serves its clients with products and services to support trading, research, risk management, surveillance and portfolio management. Trepp is wholly-owned by Daily Mail and General Trust (DMGT).

The information provided is based on information generally available to the public from sources believed to be reliable. 5