Toys “R” Us sold the bonds in October 2016, less than a year before it filed for bankruptcy. The largest portion of the offering received AAA ratings from S&P Global Ratings and Morningstar Credit Ratings. The $63 million Class F piece of the deal, which would be the first to take losses, had junk ratings.
The analysts estimated a new appraisal may value the properties at $407 million. Adding difficulty to valuations are the varying types of store locations — including outside malls, strip centers and standalone locations — and a retail industry “in such a state of flux.”
Real estate investment trusts including Retail Properties of America Inc., DDR Corp. and Kimco Realty Corp. are candidates to purchase some of the spaces in primary and secondary markets because many already operate similar properties, the analysts said. Local real estate investors may be the best option for lower-value lots, but could also end up buying mid-tier spaces if national buyers pass.
Potential replacement tenants “have significant negotiating power” when leasing the spaces, the analysts said. Some loans in the deal have other large vacancies nearby, or other weak tenants that may close stores. In some cases, potential replacement tenants like Michaels Cos. and Dick’s Sporting Goods Inc. already have stores near or in the same shopping strip where a Toys “R” Us is closing, meaning they’re unlikely to step in and lease.
“Buyers of these properties face massive execution risk,” the analysts said, noting that owners of the spaces may face lower-than-expected rents, more retailer defaults or a long leasing process.