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The Loan Ranger

What Retailers Can Do to Eke Out Value from Their Real Estate

This is Part 1 of a two-part series. Click here to read Part 2.

We all know that brick and mortar is not exactly having its heyday right now, and it’s clear that the challenging retail environment can also have an impact on commercial real estate.

So we’ve come up with a two-part guide that takes a brief look at what steps retailers and owners can take – and what current and prospective investors can look for – to make it through to the other side.

Part 1 focuses on various approaches to retaining the value of the real estate that undergirds a retailer’s stores, and Part 2 will look at what strategies are being used in successful retail ventures.

None of these tactics will necessarily save an ailing company, and some companies that have adopted these approaches are among those struggling in some way (though they may have struggled more had they not adopted these approaches). All the same, it is worth examining what actions could be up for consideration:

Launch a real estate company:
Brick-and-mortar stores can provide value in at least two ways: through their retail business and through their properties. Some companies, like Walmart and Toys “R” Us, have split off these two parts of their business.

 

This year Goldman Sachs and Bank of America issued a $512 million loan for a several properties owned by Toys “R” Us Property Company II (formerly Giraffe Properties), an indirect wholly owned subsidiary of the retailer. The portfolio includes locations at 45 Orland Square Dr. and 9555 N. Milwaukee Ave., both in Chicago.

Meanwhile, Walmart is engaged in a wrestling match with Amazon as Toys “R” Us “struggles to compete online with its cash-rich rivals,” as the Wall Street Journal reported this month.

Spin off a REIT
A short-term cash infusion provided by spinning off properties into a real estate investment trust could be a welcome respite for owners of struggling locations, but there are downsides. For instance, if many of the properties in the REIT are leased to the same tenant, shareholders are still vulnerable to losses suffered by the particular retailer and to overall retail trends.

Sears Holdings’ REIT spinoff, Seritage Growth Properties, involved the sale of over 230 Sears and Kmart stores to Seritage for $2.7 billion, with Sears leasing back much of the space but Seritage retaining the right to take it over and rent to other tenants.

The signs do not appear to be great for either Sears or Seritage. This year Sears has announced the closingof more stores (over 300) than were spun off into Seritage when it was founded in 2015, and retail REITs have been the worst-performing real estate investment trusts this year. On the other hand, some investors are seeing retail’s travails as an opportunity to pick up shares of mall REITs while they’re down.

Sell some of your retail properties
Possibly the most obvious option is to sell retail property that isn’t performing well, as Macy’s has done with properties including its downtown Pittsburgh store and its 177,000-square-foot store at Vallco Shopping Mall in Cupertino, California.

Related options include sale-leaseback, in which the owners sell the building for the cash flow but remain in place as tenants. For particularly large standalone locations, retailers can also potentially sell off portions of the property, such as several floors of a multi-story department store.

Launch a partnership
Retailers don’t have to create a REIT on their own if they choose this method to attempt to maximize the real estate value of their properties. They can also form a joint venture with established real estate investment trusts or real estate firms, as Saks Fifth Avenue and Lord & Taylor parent company, Canadian retail giant Hudson’s Bay Company, did with Simon Property Group and Canada’s RioCan. It should be noted that Hudson’s Bay cut 2,000 jobs this year.

Some of these tactics may indeed help retailers eke out as much value from their real estate as they can, but let’s be frank: None are sufficient in and of themselves to confer immunity from the challenges posed by the rising growth of e-commerce and other retail trends.

On the bright side, while U.S. retail may be thinning out, that doesn’t mean it’s going away – or that a downward slide is inevitable for any given retailer.

Stay tuned for our next installment on what retailers, owners, and current or prospective investors may want to consider as retail continues looking for ways to survive and, ultimately, thrive once more.

 

An earlier version of this article was initially published by CrediFi CEO Ely Razin on Forbes.

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