What Are Zombie Retail Stores Really Worth: Answers Emerge

“Little or nothing.” Toys “R” Us and its commercial mortgage backed securities.

Here’s what a central-bank induced credit bubble – when investors are chasing yield while willfully ignoring risks – looks like when in full bloom, and what happens when even the worst-case scenario at the outset turns out to have been more hype than realistic.

This is how it started:

In October 2016, about 11 months before it filed for bankruptcy and 17 months before it decided to liquidate its operations in the US, Toys “R” Us sold $512 million in commercial mortgage-backed securities, backed by 123 Toys “R” Us and Babies “R” Us stores across 29 states with a combined 5.1 million sq. ft. rentable area.

At the time of the deal, the over-indebted brick-and-mortar retailer, which had been stripped of cash and loaded up with debt by its PE firm owners following the leveraged buyout in 2005, was already in financial trouble, deeply engulfed in the brick-and-mortar meltdown.

Nevertheless, it was able to persuade S&P Ratings to rate the $512 million in “commercial mortgage pass-through certificates,” as they’re called (TRU Trust 2016-TOYS). The borrowing entity was Toys “R” Us Property Company II LLC. The servicer was Wells Fargo. The deal was cut into six slices, with the lowest-rated slices taking the first loss:

  • A: $244.8 million, or 48%: AAA
  • B: $52.1 million, or 10%: AA-
  • C: $39.1 million, or 8%: A-
  • D; $47.9 million: BBB-
  • E: $65.1 million: BB- (junk)
  • F: $62.9 million: B- (junk)

In other words: 48% of the deal was rated AAA, 66% was rated A- or higher, and about 75% was rated investment grade (BBB- or higher).

But no problem. At the time, S&P assigned a value of about $618 million to the collateral. So there was nothing that could go wrong.

S&P said at the time that the ratings were based on its “view of the collateral’s historic and projected performance, the sponsor’s [PE firms KKR, Vornado Realty Trust, and Bain Capital that own the place] and managers’ experience, the trustee-provided liquidity, the loan’s terms, and the transaction’s structure.”

It added that even in their worst-case scenario – the “dark value” scenario – things would be just fine: “We determined that the loan has a 98.3% beginning and a 91.4% ending loan-to-value (LTV) ratio based on our estimate of the portfolio value under a “dark value” scenario, where the master lease tenant is no longer able to meet its obligations, vacates, and the properties must be re-tenanted.”

And this is how it turned out:

Now the worst-case scenario has gotten a lot worse. Deutsche Bank analysts Ed Reardon and Simon Mui wrote in a note Wednesday, cited by Bloomberg, that as many as 26 of the 123 properties backing this deal may have little or no value if they’re vacated by Toys “R” Us and would have to be re-leased – which is likely given the liquidation of Toys “R” Us.

They figured that a new appraisal of the properties will likely show the value, estimated at $618 million at the time of the deal, may have dropped 34% to $407 million. Bloomberg, citing the analysts:

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.”

Other retailers that would want to move into the stores will be hard to find for many of the locations, as their own operations have gotten tangled up in the brick-and-mortar meltdown and a slew of them have filed for bankruptcy, and many more will soon do so, and they will shrink their footprint, and some of them will get liquidated. And these stores will become vacant too — if they haven’t already.

The analysts wrote that an appraised value of less than $495 million could lead to the $63-million F-tranche losing control of servicing decisions or taking losses. At an appraised value of $407 million, the losses will expand. And the brick-and-mortar meltdown has just gotten started.

While there are retailers that want new locations, and while there are some mall REITs that are looking at opportunities, they will only be interested in the best-situated properties. The analysts hoped that local real estate investors might be the best option for lower-value lots. And they won’t be willing to pay a lot for these properties.

These buyers “face massive execution risk,” the analysts wrote, including lower-than-expected rents, more retailer defaults, a long leasing process, and potential tenants that “have significant negotiating power.”

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.

As the old and now forgotten banker adage goes: Bad deals are made in good times. And perhaps conversely: It takes bad times to be able to make good deals.

Brick & Mortar Meltdown and the mall REITs: The weakest plunged 80% and the strongest plunged “only” 30%. Read…  What Are We Going to Do with these Plunging Mall REITs?

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  53 comments for “What Are Zombie Retail Stores Really Worth: Answers Emerge

  1. mvojy says:

    Hey Wolf,
    Are the PE firms that caused the downfall of this company allowed to buy the assets that are sold during the bankruptcy liquidation? It seems like they fattened it up and ate all the meat but now they might be ready to pick the bones.

    • Wolf Richter says:

      Yes. In fact, many times the PE firms will buy the debt for cents on the dollar to have more power at the bankruptcy table. Common practice.

      • RepubAnon says:

        A practice that would, in a just world, be outlawed. PE firms should be forced to disgorge all moneys paid to them by the takeover target if they file bankruptcy within, say, 10 years of the takeover.

  2. worldblee says:

    Perhaps gutted super store retail locations can be turned into a new wave of hipster condos by positioning them as an ironic evocation of the American dream?

    In my view, the fraudsters at S&P should be on the hook for some of this. They’ll obviously rate anything as a worthwhile investment if the fee is right, to heck with facts. Are there no ramifications for these rating agencies?

    • mvojy says:

      The future will be mixed use rentals with apartments on top and food, entertainment and things the internet can’t do (nail salons, dry cleaners, bagel/coffee shops, etc). You will tell your friends to meet you at the movie theater and then just take the elevator downstairs to meet them. The future is full of rentals so the only problem is keeping people employed to fill those units with those able to afford them.
      Couldn’t agree more on the rating agencies. If you say a loan is good and it defaults just a few months later you should have your license revoked.

      • Mike B says:

        Possibly, if built on top of the existing footprint and well situated to mass transportation infrastructure.

        But the HUGE problem with these big box developments and that construction type in general is that they can ONLY be re-purposed into some other ‘Big Box’. They are completely useless for anything else. I say this as an architect with 25 years of experience in renovation and adaptive re-use work. I wish there was some other creative option for these sites but there just isn’t. The sunk costs and mal-investment is simply horrible.

        Its a dead mall dystopia worthy of William Gibson as far as the eye can see.

        • alex in san jose AKA digital Detroit says:

          The number of empty store fronts and empty “tech” buildings in my city is amazing. And there are all kinds of specuvestors … a pet peeve of mine is how they took a really neat looking building that housed The Hoffman Agency, some kind of advertising business I guess, and took out the neat-looking glass brick curved front and turned it into yet another McTech McStyled bland box, painted black for God knows what reason, and it sits, empty, as it has for years now. Along with all the other tons of empty buildings, large and small, in the area.

          The sheer amount of empty land and empty buildings/store fronts in San Jose, California, is simply amazing.

          On the bright side, apparently renting a small office and living in there on the downlow is not that uncommon, and offices are available all over the place for a few hundred a month.

        • Michael Fiorillo says:

          It’s Kuntsler’s Geography of Nowhere, or what writer Peter Plagens called The Ecology of Evil.

          The waste, first with old Downtowns sucked dry by government subsidies for this kind of development, followed by their intrinsic lack of viability now playing out in various ways.

          Waste, everywhere, you look…

      • Olivier says:

        “mixed-use rentals with apartments on top [of residual malls]”. I expect there will be some zoning difficulties with that: zoning in the US is entirely predicated on making mixed-use unlawful.

  3. Laughing Eagle says:

    Just like in the financial crisis of 2008, the rating agencies would not get the business if they did not give favorable ratings.

    • Anon2017 says:

      Muni bonds backed by the major muni bond insurers received AAA credit ratings in the 1990’s. An S&P analyst assured me the the bond insurance companies had been stress tested for a Great Depression scenerio. I guess they weren’t stress tested for a fraudulent real estate market.

      The muni bond insurers were allowed to have a risk to capital ratio of 150 to 1 and still maitain their AAA claims paying ability. When the insurers got into the business of insuring mortgage backed securities, the ratio should have been lowered to 25:1, which was the limit placed on mortgage insurance companies such as PMI. Even with the lower limit, PMI still managed to go bust.

  4. Bill says:

    There may be a growing and understandable belief that Congress considers any large established segment of the economy to be too big to fail. For example, an article on ZeroHedge yesterday reported that Congress may be considering a bailout of private multi-employer pension plans. And who is a frequent investor in these high-risk mortgage-backed securities? The very same pension funds, no? So if the pension funds believe they are too big to be allowed to fail, that fact may at least in part explain their otherwise seeming lack of investing prudence in securities such as these.

    • MC01 says:

      Politicians being what they are, they are always touting grandiose spending plans which are, apparently, sure ways to get votes. They range from bailing out pension funds to building a new football stadium.
      If I were younger I’d just call them windbags and move on but I’ve seen enough grandiose spending plans and their side effects materialize to wonder more and more why people still fall for these scams.

      On a related note taking an extra pinch of salt when reading Zero Hedge is advised by 9 physicians out of 10.

  5. Paulo says:

    For many years we’ve had an empty Target store (Canada), in a great looking mall. The building, itself, is still being kept up but it sure is empty. I don’t see anything moving in any time soon. There aren’t even any rumours.

    Maybe these stores won’t ever be reoccupied. As for repurposing, you are basically stuck with a shell defined by someone else. Often, it is cheaper to just build from scratch than to renovate. Or, tear the sucker down. Once the windows start getting broken the clock speeds up.

    • Mike B says:

      Tearing them down is usually the only real option. You cant even re-use the concrete pad in most cases because the column layout and footers weren’t designed for any other structural load and certainly not for any sort of multi-level structure. They are basically useless for anything other than a ‘Big Box’

      Maybe massive grow op’s? Naaa, Nobody can smoke THAT much 420 ;)

      • alex in san jose AKA digital Detroit says:

        The city of Sunnyvale here in the Bay Area had, for years, a massive eyesore abandoned mall that over the course of many years, was very slowly bulldozed and eventually, half of downtown taken down and turned into huge buildings. There’s a tiny scrap of the old downtown left. The rest doesn’t even look like a place for humans but maybe inhabited/visited by giant Transformer robots or something.

        That’s what’s annoying about the only workable course of action being to demolish … because invariably they only build something even unfriendlier.

      • Lars says:

        Here in my small town, we had a store called “Area 420” which I could never understand the reference to. Can you explain please ? Thanks !
        They had lots of bongs and that sort of stuff, this was a couple of years ago, they closed after a year.

        Regarding the Toys R’Us vacant retail space, they could rent out spaces on the weekend to people looking to host ‘garage sales’ ! lol

    • Prairies says:

      The Target that closed down the road from me was turned into more mall “stores”. I heard a gym was in it also. Simple wall structures put up. some basic wiring and that is all. No major plumbing type changes, just some conduit running power and maybe some phone lines. I still haven’t been in it, I haven’t been out that way in awhile.

      • JohnnySacks says:

        Been in one. All the tenant sublets need to share and upkeep the bathroom of what used to be the big box. Otherwise a huge plumbing retrofit is required.

    • economicminor says:

      You guys aren’t being very creative.. There are lots of uses and tearing them down isn’t cheap. Neither are new structures. The last few decades of cheap money has distorted everything. As money gets more expensive so will the costs of tearing down and rebuilding.. Life has changed, The markets are changing direction.. Materials and recycling cost are going to go up. The era of accessible resources is mostly gone.

      All this while the middle class has shrunk and will continue to do so. AI is taking jobs even in agriculture. Pension funds are mostly in trouble and we haven’t even gone into a recession. Things are going to get tight for everyone and an existing building that is debt free is will be way better than a huge new pile of debts going forward.

  6. cdr says:

    “What Are Zombie Retail Stores Really Worth: Answers Emerge”

    Answer: My HP 8620 printer, little used, started printing with white lines. The print head is dirty. Built in diagnostics didn’t fix it. Choices: toss it out, buy repair kit, replace print heads with new or other than new.

    None of these choices, other than throw out, would be possible without the internet. No store could fix it, except for possibly a repair store that would cost much like throw out the printer.

    Went with repair kit for $15. If that doesn’t work I will replace the print head, but shop for a bargain that costs less than the average amount. Thank you Google.

    Replace the printer would cost a lot more.

    FYI, I will never buy another HP printer. I also have a little used Brother printer that easily cleans clogged print heads, caused by being little used. HP also required me to find and install, after a lot of looking, firmware that allowed me to use non-HP ink after it my printer decided that my non-HP ink had expired. The printer stopped printing otherwise. My Brother printer works great with non-Brother ink and always has.

    Non-mfgr ink would also not be available at non-retail outlets.

    Retail has become a specialty business to fill in where internet shopping drops the ball.

    Note to Fed: This is deflation. Zero rates would have no effect on it, other than make me spend no money to fix or replace it since my income from lack of interest income would prevent me from being able to afford it. I would go with pdf even more and maybe buy a $50 junk printer if absolutely needed. How do your models deal with that?

    • cdr says:


      Non-mfgr ink would also not be available at retail outlets.

    • Kent says:

      I’ve been through all the major printer manufacturers over the years. Epson was the absolute worst. HP and Brother about the same.

      There’s a business in reverse engineering HP printer electronics and firmware, but I’m sure it’s all covered by IP laws.

      • Harrold says:

        I bought a B&W laser printer. Far superior to ink jets and the toner doesn’t dry out like the HP’s do.

        • Bruce T. says:

          We were “informed”, when we bought our laser printer, that the cartridges were only partially filled so they do not “spill” in transit, and thus they would need to be replaced before too long – at exorbitant cost of course. But I still wonder: what the hell can spill in a closed container holding powder???!!!!

        • Drater says:

          I went B&W laser years ago and it’s far superior to ink jet for cost and convenience. On the rare occasion I need to print something in color I use the printer/copier at work

        • alex in san jose AKA digital Detroit says:

          Same here, loooooove my b&w Samsung laser.

        • quack says:

          Every printer set up to stop working when there is plenty of toner. Look the net to find out how to fix it. Usually takes some IQ but extends the life of cartridge. Brother toner life doubles.

    • jumbalaya says:

      I print 10-20 things a year – not worth it to buy a printer that just sits there, so I go to the local library – per page is 15 cents i think. Let them maintain it. I have 4 libraries within a 20 minute drive, so no worries about a busted printer or library closure when I need to print.

      Oh, and I dig the handle Kenny Logouts – highway to the danger zone is exactly what this economy is on!

    • Carl says:

      Got the best printer, had it for a few years now, never had a problem with it and still haven’t changed the ink cartridges! Its called “Staples” I email pages to be printed to staples “Print me ” and they send me a personal ID code and you go to the printer and type in code.
      You can pick color or B&W, paper grade, it marvelous! They even have a cutter and paper clips and staplers to use…
      Ill never buy another printer, well also I live in a RV, so no room for that kinda luxury

    • Nicko2 says:

      Laser printers are the way to go. One cartridge can print several thousand pages….so depending on your purposes, a cartridge could last you years. The reason why inkjet get clogged is because the ink dries out on the printer head. Lasers heat a powder and bond it with the paper, which is far superior kind of technology. As others have said, use someone like kinkos for infrequent print jobs, far cheaper than buying yourself. Actually, now I scan things quite a lot, but paper is virtually eliminated from my workflow.

    • fajensen says:

      Why even bother?

      I took one of these multi-function ink-jet printers apart recently for the fun of it, and there is like one DC-motor driving the whole thing via about a hundred plastic cogwheels, one small control board, and about the shittiest power supply possible.

      Nothing of value there!

      Replace with a good quality laser printer is a better use of ones resources, IMO.

  7. Kenny Logouts says:

    So the values aren’t reliable?

    Everyone else assuming that if they go bankrupt it’ll be in isolation of the wider economy?

    This should be amusing for those who blindly invest in anything.

  8. Square Peg says:

    “Bad deals are made in good times.”
    How true, I’ve always known that good deals are made in bad times but I’ve never flipped it over like that.
    Thanks Wolf!

  9. raxadian says:

    I hope I am not getting too annoying with my “malls bad!” posts but the evidence been supporting that for decades. Yet the general public remains ignorant. And malls are even harder to recycle than gas stations and that’s saying something.

    Anyway, back on topic

    *”view of the collateral’s historic and projected performance, the sponsor’s [PE firms KKR, Vornado Realty Trust, and Bain Capital that own the place] and managers’ experience, the trustee-provided liquidity, the loan’s terms, and the transaction’s structure.”*

    So we have historic +sponsor+ managers’ experience + trustee-provided liquidity = Run, run to the hills that a flood is coming!

    More seriously if you ever heard “historic performance” and specially “managers’ experience” then they are just using buzz words and the deal is crap.

    There is no magical formula to find if a deal is good because people cheats. The numbers might look good, heck the numbers in the real books might still look good, but BEWARE, is pitch dark so you might be eaten by a grue! (That means that you can still get scammed if you are careful, is just less likely)

    But there are plenty of ways of finding if a deal is bad.

    A bit of advice, storehouses (also know as warehouses) are way more valuable than malls. What, how? Sure malls might be more valuable on paper but once the mall closes and no other mall wants to open there, then what?

    A storehouse or warehouse is always valueable because people always needs a place to store their stuff. And even if the storehouse got chemically polluted there is some merch that can still be stored there.

    Heck they are easier to tear down to build something else there than malls too.

    Not saying you should go and buy storehouses, but next time someone asks for a loan, how about asking the storehouses as collateral instead of the stores?

    Sure small store places are easy to recycle, but malls? Hahaha, welcome to pain.

    Relevant links:

    Hey Wolf, ever thought about writing a book about corporate scams? Now a how to guide but as a warning.

    Something like “Corporate Hoods: Or how corporations scams billions” Or something like that.

    • Wolf Richter says:

      Good idea. But I’m done writing books, it seems. Unless a real publishers pulls out a big-fat check book and pays an advance. I have tried to pry open the doors of the book publishing industry for years. So now, they contact me about 2-4 a day to do book reviews on my site and promote their crappy books, now that WS can sell a whole bunch of books. But they wouldn’t even read my manuscripts. To hell with them.

      • raxadian says:

        How is your Russian Wolf? You appear so much in the Kaiser Report you might be able to sell a manuscript or two in Russia.

        Or you could get a patreon or something like that…

        • Wolf Richter says:

          Posting comments after one too many drinks, raxadian? I’ve been on the Keiser Report since 2012. I’m on it a few times a year. Nowadays, Max does it in sets of two (one recording session, two interviews). I don’t care on what channel the show runs. Max and Stacy are Americans, and we communicate, as you might imagine in your sober moments, in English, not Russian.

      • alex in san jose AKA digital Detroit says:

        Wolf – Here’s a website I discovered years and years ago, I think you’ll really like it.

        His strong points are self-publishing, real estate, his amazing “real estate guru ratings”, a wonderful taking-apart of Robert Kiyosaki, and … coaching HS football. He’s a very level-headed, intelligent guy, and I sense you two may be quite alike in personality. There’s tons of good reading on that site.

  10. Jason says:

    Probably a little off the main topic, but, I don’t feel sorry for these big giants going down… It’s called Carma…
    Maybe, just maybe this will help the Ma and Pa Hoby store downtown a little… Maybe not…But I’m 48 years old, and it’s been a sad slow death of the little guys for much of my adult life. All the way from the local lumber yards too the small hoby/toy stores that we all once enjoyed…
    unfortunately, these big giants are being taken down by even bigger giants…. When will it stop!

    • kevin says:

      You know for a fact we all get our own little karma in due time, right?

      For each of our short (and shortened) lives, all our material achievements and lifelong struggles really mean very little when we’re counting down our clock here.

      For what’s its worth….the founder of Toys R Us had to die of a broken heart just days after news broke on the bankruptcy.


      If you want a nice ending to “and he dies happily ever after…”, its probably better to go before the baby you spent a lifetime building inevitably dies on you.

      In contrast, Steve Jobs last words on his deathbed happened to be “Oh Wow.” He had his lifetime of struggles too but ended on a high (without weed ;).
      As Apple gets cooked slowly under the hands of Tim Cook, Steve is spared the agony of watching the looming train wreck. Sames goes for other corporate greats like Hewlett and Packard too.

  11. Dan says:

    Libraries have the best printers and cost pennies to use….no maint, no ink, no problems for you…visit one and enjoy.

    • alex in san jose AKA digital Detroit says:

      FedEx Kinko’s too. Hand ’em a thumb drive, they’ll do any kind of printing you want. Huge banner? Fine. I saw some very high quality (like frame and hang on the wall quality) prints at my local hole-in-the-wall UPS the other day too.

  12. Bobber says:

    There’s been speculation that Amazon would buy Kohl’s to have physical retail space. Why would they do that if they can pick up Toy’s R Us locations for a song.

    I’m not convinced Amazon would even want any physical retail locations in the first place. It conflicts with their model, unless they want to open a bunch more Whole Foods stores.

    • CDO says:

      The future of brick-and-mortar is going to be a hybrid mix of inventory (warehousing: faster drop-shipping for e-commerce), fulfillment (buy online, pick up in store), traditional retail, and non-retail services (eg. FedEx, financial services etc.).

      This requires that the companies are platform-based, and designed to maximize yield regardless of channel. Amazon meets these requirements. Walmart is chasing.

      The future of current retail real-estate inventory will not be based on the same models that were in place when the initial investments in development took place.

      (BTW: The empty Target in Canada is the result of a billion dollar expansion that failed due to inability to properly plumb data and IT needed to actually stock, manage, and run the store. Commerce that grew up online will have less issues like this as they evolve from being solely online. This is why one shouldn’t simply look at the Amazon/Kohl’s relationship as being simply about buying physical square footage in location x).

  13. William says:

    Contrarian here. I’m loading up on the beaten down stock of Ascena (ASNA) which owns Ann Taylor, LOFT, Lou & Grey, Lane Bryant, maurices, dressbarn and Catherines brands, and for tween girls under the Justice brand. And Pier One (PIR) stock caught my attention recently, too.

    • Baritone Woman says:

      2 Questions:
      How do you know those stocks will not get de-listed and the companies not go bankrupt?
      Are the big boys buying these stocks as well?

      • William says:

        The retailer stocks with large cash balances, free cash flow, and higher margins will not get de-listed and go bankrupt. When the whole industry gets their stocks beaten down, even the good companies see their share prices suffer.

        Big boys, like pension funds, do maintain positions in ASNA. As the ASNA turnaround proceeds, more big boys will jump in to take advantage of the rise in share price.

  14. chris hauser says:

    well, either you buy the rosy scenario going in, or you don’t.

    now the shell gets “serviced.”

    toy story.

  15. Steve clayton says:

    We have a big clothing retail co in the UK called Next. It made about 1 billion dollars profit last year then complained it’s had it’s worst year for a long time!

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