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Former Toys R Us Landlords, Investors Tussle in Opening Round of Bidding Over Bankrupt Retailer's Store Leases

Updated: Landlords Hoping to Attract Higher Rents and Value Through Redevelopment, Re-Tenanting as 735 Stores Go Dark Across the Country
April 12, 2018
Benderson Development beat out several bidders, including Federal Realty Investment Trust, in offering $15.6 million for the Toys R Us and Babies R Us store in Emeryville, CA (pictured) near Oakland.

A U.S bankruptcy judge Thursday approved 44 uncontested bids for Toys R Us and Babies R Us leases across the country in the first round of dispositions for the 735 stores to be closed by the toy retailer.

Following an auction two weeks ago at the New York City offices of law firm Kirkland & Ellis, LLP, Wayne, NJ-based Toys R Us, Inc. picked 50 winning bids for less than one-third of the 157 Toys R Us and Babies R Us locations ranging from 20,000 to 70,000 square feet offered for sale last month by bankruptcy disposition specialist A&G Realty Partners.

The 50 bids for Toys R Us owned assets and leases ranged from less than $5,000 for a closed store site in West Hartford, CT, to a top bid of $15.7 million for a 44,281-square-foot Toys R Us and Babies R Us store in Emeryville, CA in the San Francisco Bay Area. New Jersey based Benderson Development beat out a dozen rival bids for the property.

At a hearing Thursday afternoon, U.S. Bankruptcy Judge Keith Phillips approved the sale of 44 of the bids, while postponing consideration of several other leases until a hearing later this month to consider objections by various parties, including the owner of the Toys R Us store in Paramus, NJ, who is opposing furniture seller Raymour & Flanigan's winning bid to take over the lease.

While U.S Toys R Us stores will go dark by June 30, the company won approval Wednesday in U.S. Bankruptcy Court in Richmond, VA, for $80 million in additional debtor-in-possession financing to prop up its operations in Asian and Central Europe. Toys R Us attorney Joshua Sussberg told Phillips that the overseas operations known as TRU Taj LLC have received multiple bids for an 85% stake totaling more than $1 billion.

Retailers such as Big Lots, PGA Tour Superstore, Burlington Coat Factory, Shoe Station and furniture seller Raymour & Flanigan submitted successful bids for a handful of U.S. properties, constituting a small fraction of the 735 Toys R Us and Babies R Us stores totaling nearly 30 million square feet scheduled to close in coming months. Developers such as Benderson and Festival Development Corp. have locked up sites in Emeryville and Highland Park, IL, and even Amazon is rumored to be considering others as potential order fulfillment or retail sites.

The deadline for bids on the Toys R Us locations in Canada is Friday, with an auction scheduled for April 18.

Landlords Look to Push Rents, Reallocate Space

In the age of Amazon, filling the soon-to-be vacant Toys R Us locations may require novel approaches, including subdividing boxes for smaller retailers or converting the sites to offices, last-mile distribution centers or other uses, according to a recent Marcus & Millichap report on the liquidation.

The soon-to-be dark stores could bring expansion opportunities for retailers in low-vacancy markets where Toys R Us has a large footprint, such as Boston, Pittsburgh, San Diego and Northern New Jersey, according to Marcus & Millichap. Other areas with higher levels of new retail construction and elevated vacancies, such as Houston, Detroit and the Inland Empire in Southern California, could face more risks as the empty Toys space hits the market.

Smaller strip centers and neighborhood shopping centers, where the loss of a major tenant may cut into foot traffic and prompt other tenants to terminate their leases under co-tenancy clauses with landlords, are considered to be especially vulnerable to the Toys R Us closures, analysts and local brokers said.

However, many retail brokers around the country are heartened by the initial burst of inquiries about leasing or acquiring the mostly big-box spaces.

Jorge Rodriguez, executive managing director with Colliers in central Florida, said he is seeing interest from fitness centers, organic grocers such as Sprouts and Earth Fare for the 30,000- to 35,000-square-foot Toys R Us stores in his market. PGA Tours, Burlington Coat Factory, Big Lots and other larger box tenants have shopped the larger format space occupied by Toys R Us and Babies R Us.

Many of the initial bidders for the stores are landlords savoring the potential for raising rents when the toy seller leaves. While Toys R Us has been paying rents of $10 per square foot and below for its space in central Florida, junior anchor boxes in Rodriguez's markets are fetching rental rates in the $15 range.

"There's definitely a rent upside," Rodriquez said. “The closures certainly add to the overall vacancy, but as a landlord, I'd see this as an opportunity rather than a liability. The biggest challenges for owners will be finding uses that uphold exclusive co-tenant agreements with existing grocery stores and other large tenants."

Anjee Solanki, national director of Retail Services for Colliers International, isn't surprised that landlords are first in line for the initial round of Toys R Us leases.

While stores in centers with in-line tenants will mostly be up for re-leasing to other tenants, owners of freestanding Toys properties in power centers, particularly those competing regional shopping centers in their trade area, may opt to assemble and redevelop the outparcels as new retail stores, food courts or as medical office buildings, apartments, hotels and other non-retail uses, Solanki tells CoStar News.

"Landlords are paying top dollar for some of these assets," Solanki said. "If owners of Toys and Babies R Us combination properties can reallocate gross leasing area to high-rise or midrise multifamily and hotel uses, and go vertical by six levels, then it's a completely different conversation - the value of that gross leasable area has increased significantly."

In addition to grocery stores, big-box tenants, furniture and home furnishings stores are interested in some sites, Solanki said.

"They want visibility and they're comfortable buying in locations that you might say are 'off Main and Main' because they're a destination and those sites have great parking availability," she said.

Billionaire's Crowdfunding Effort to Save Toys Losing Steam

Meanwhile, a privately funded effort to acquire some of the chain's assets to retain as a toy seller is appearing to lose momentum. Isaac Larian, CEO of MGA Entertainment, the world's largest privately owned toy company, announced on LinkedIn recently that he will be making an offer to buy Toys R Us Canada and some of U.S. assets.

The billionaire entrepreneur born in Iran launched a GoFundMe campaign to acquire the chain's assets following its liquidation announcement last month, pledging $200 million of his own money in a drive to raise $1 billion. However, Larian, head of the company behind Little Tikes, Bratz and other popular toy lines, said Thursday the crowdfunding effort has come up short.

"I hope the bankruptcy court, board, creditors, advisers accept our offer before it’s too late," Larian said in a previous post. "I will need the help of all Toys R Us associates and their passion and hard work and sacrifices to get this company back on its feet and glories."

Editor's note: This update includes the bankruptcy court judge’s approval late Thursday of most of the winning bids chosen by Toys R at a March 29 auction.

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