What now for Toys R Us landlords?

Toys R Us creditors have today voted with a 98% majority in favour of the planned CVA restructure, meaning the closure of 26 stores. The final outcome was largely driven by the Pension Protection Fund vote after the retailer agreed to pump an additional £9.8m into the pension plan. Steve Knights, managing director of Toys R Us UK, said: “We are pleased to have secured the support of our creditors and will be working closely with them in the months ahead.” He confirmed that all UK stores will remain open until spring 2018, after which 26 stores will close as part of the CVA restructure. The remainder of the 105 store, 30m sq ft portfolio will, for now, remain occupied by the retailer. Landlords of those stores that are closing face big rent drops and looming reconfiguration costs estimated by experts to be £1m for an average store. Those that own stores not closing as a result of the CVA proceeds will also be considering their options for the future should the troubled retailer look to shed further costs down the line or once again linger on the brink of administration. Challenges for landlords Landlords looking to relet stores will need to look at downsizing, breaking up and reconfiguring, both structurally and aesthetically. One source close to the retailer told EG: “The biggest issue is the size of the stores they’ve got, they’re not fit for modern retail use”. Another said: “It’s one of the most unmanaged estates there has been because Toys R Us haven’t been [in the financial position] to do anything.” EG analysis revealed the average Toys R Us property is 32,000 sq ft, with some sites in the Midlands reaching almost 55,000 sq ft. Two-thirds of the stores are in out-of-town retail parks, which have seen healthy rents kept up by a collection of retailers, many in bulky goods and furniture, along with others that have better adapted to digital trends, such as click-and-collect. [caption id="attachment_900968" align="aligncenter" width="847"] Stores will stay open until after the Christmas period. Pic credit Ray Tang/REX/Shutterstock.[/caption] Vacancy rates in retail parks are currently at a 20-year low across the UK, after a definitive bounce-back for the sector in recent years, suggesting demand for out-of-town sites will maintain. However, another source warned: “The bulky market has been buoyed up by a couple of retailers paying hot rents to get on the right parks, and that’s been holding values across the estates for the major landlords.” The remaining 35 sites are based in town centres, on high streets and shopping centres, where it is likely many will close and landlords will struggle to match rents with the stores they fill. A general decline of high street retailers has seen occupiers looking for deals and incentives through lack of competition in the years since the stores were let. Toys R Us rents average at £8-12 per sq ft. New out-of-town occupiers Toys R Us sublets some leasehold stores to TK Maxx, M&S and Aldi, having previously selected sites with upcoming lease expiries and worked with landlords to finance the reconfiguration of sites. A number of the sites have full open consent, with others offering flexible planning consent that will enable structural changes and potential repurposing, if this is required. Michael Neal, head of UK investment at TH Real Estate, said: “From a landlord perspective, a number of those properties could be quite valuable. They might carve up into a number of units or potentially offer redevelopment opportunities where stores are strategically located. I think retail warehousing at the moment is not in a bad space. It’s moving with the structural trends.” He noted there will be vacant properties, but added: “There will be subdivision possibilities. If you’ve got good quality parks then footfall is pretty robust at the moment, and the convenience that you get with retail warehousing is playing into the way that consumer trends are moving.” [caption id="attachment_900967" align="aligncenter" width="847"] Some stores, such as those that have adopted click and collect, have fared better.[/caption] John Maddison, partner at Quadrant Estates, said town centre stores will be the hardest to relet: “Looking at their portfolio as a whole previously, I think the town centre and edge of town sites would be quite challenging”. But he noted the potential for interest for out-of-town sites from neighbouring occupiers as well as strong competitors, such as Smyths Toys. “You would have thought that they’d see it as an opportunity to not only get ahead of the competition, but also to position themselves strategically in some of Toys’ best trading locations where they don’t have a presence.” “Some of the furniture/home retailers aren’t in these locations and for the strong locations then they’ll be chasing them too, I imagine. Equally as a landlord with a specific re-letting agenda, you may find yourself fending off interest from discounters and other occupiers that you don’t necessarily want to see assigned to directly via the administrators instead.” Demand will also be highly location dependent with interest likely to be high for its stores in the likes of Teesside and Enfield, but less so for struggling locations such as Basildon town centre. Maddison said: “It will remind everybody that the flight to prime is a pertinent move in a retail market that’s constantly still polarising. You’re going to be less affected by this if you’ve bought well and if you’ve got prime property, then your rental growth prospects and re-leasing outlook is going to be that much stronger.” Toys’ CMBS conundrum In 2013, the UK prop co subsidiary of Toys R Us, which owns 31 of its stores, took out a £263m CMBS loan against its portfolio. The Debussy CMBS at the time of issuance valued the portfolio at £315m. PIMCO bought the £236.8m of the most senior debt with Marathon Asset Management buying most of the remaining junior notes. Toys’ struggles are likely to see the value of the underlying property having fallen since the issuance of the CMBS and as a result the level of debt will be much closer or could even exceed the level of debt. This could see the property assets move into the control of the lenders or servicer of the CMBS, Situs. Toys R Us pays its property company subsidiary rents as high as up to £35 per sq ft. However, open market rents for such properties are around half that figure. COMMENT: A victim of its own success? by James Child, Retail & Industrial Analyst, EG Toys R Us’ future in the UK has been plunged into doubt following the news that the PPF would vote against the company’s proposed rescue plan. It was announced in early December that the retailer was to close 26 of its stores up and down the country, but this news has left the entirety of its 105 strong portfolio at severe risk of closure. We know that the retail market has become increasingly competitive over the past five years – we have seen a huge number of well-loved retailers fall by the way side as they have failed to adapt to the new climate. Toys R Us has followed suit, from being a market leader in the 1990s to failing to keep up with the rest of the competition, exacerbated by the way that consumers are shopping. The effect of online spend – which has peaked at 18.3% of all retail goods on November 2017 – has had a huge effect on the way retailers sell their goods and what good consumers are actually demanding. However, this is not the only reason for failure. Its competitors – for example, Argos and the Entertainer, continue to flourish. Toys R Us then has in many respects, been a victim of its own success, with a dated retailer proposition, and being physically locked in to many large units, which it simply doesn’t need anymore. It has an estimated floorplate of 3m sq ft in the UK. The average floor plate for a Toys R Us store is 32,000 sq ft, according to EG data, and it would seem that the retailer has failed to strip down its portfolio in time. Unsurprisingly, two-thirds of the portfolio footprint can be found in out of town areas – and given the resounding bounce-back of retail parks over the past few years – the next question is IF TRU does head toward administration, then what will become of the space left? Vacancy rates in retail parks are currently at a 20-year low across the UK, so there is little doubt that there will be demand from other retailers for that empty space. We are likely to see subdivision of many of the units at the top-end size wise, much as we have seen with the restructuring of the B&Q portfolio earlier on this year. We can also expect to see leisure operators lodge plans for some units, trampoline parks being a good example of how large isolated units have been filled in recent times – buoyed by a change in consumer spending and habits, typically from millennials spending money of activities over goods. Landlords can expect these stores to be re-filled quickly and propped up with strong rental returns as out of town retail continues to defy the odds and perform well in an increasingly digital age. Current average rents in out-of-town areas for those average range of sized units are coming in at around £8-£12 per sq ft.