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Mervyns Expected to File Chapter 7 Today, Means Full Liquidation of 150 Remaining Stores

Mervyns Department Store Chain Expected to Convert to Chapter 7 Today
October 17, 2008
To see the update on this story, follow this link.

The Mervyns department store chain is expected to convert from Chapter 11 to Chapter 7 bankruptcy today, a move that would require the retailer's full liquidation of assets. Before filing bankruptcy, Mervyns had 176 stores; it immediately announced the closing of 26 stores that are currently in the process of liquidation, leaving it with 150 stores left in the chain in CA (121), AZ (16), TX (7), UT (6), NV (3), NM (3).

Hilco Real Estate is the firm charged with the disposition of Mervyns' first phase of closings -- those 26 store leases range in size from 52,828 square feet to 89,693 square feet.

A Chapter 7 liquidation comes as somewhat of a surprise, as moderately-priced fashion apparel retailer, Forever 21, recently said it had submitted an offer to acquire 149 of Mervyns' remaining stores for an undisclosed amount. Perhaps Forever 21 has been unsuccessful in obtaining financing required to close the deal.

Founded in 1949, Mervyns was acquired by Dayton Hudson Corp. (later known as Target) in 1978. In the late 80s, the retailer attempted to expand in the southeast (particularly in Atlanta and Florida) unsuccessfully, closing the stores by 1998. Mervyn's then turned its focus back to California and in late 2004 was sold to a private equity consortium including Sun Capital Partners, Cerberus Capital Management and real estate investment company, Lubert-Adler Management.

In August 2005, a joint venture between Developers Diversified Realty (NYSE: DDR) and Macquarie Trust acquired 36 open and operating Mervyns stores, totaling 2.74 million square feet and located primarily in California, in a 15-year sale-leaseback deal for $396.2 million.

Dan Hurwitz, president and COO of DDR commented on Mervyn's in its second quarter conference call. "We acquired 36 of our 38 Mervyns stores in 2005. Notably we bought the first portfolio they sold post LBO and were able to select what we believe are the most attractive locations. Approximately 70% of the assets are based in California including nearly 1 million square feet in and around Los Angeles and over 500,000 square feet in the Bay Area. If our Mervyns locations should become available to release, we believe there will be significant retailer interest in the sites we own. Within our core portfolio alone for example, we re-tenanted a former Mervyns box in Utah with Ross Dress For Less, DSW and Michaels increasing rental revenues over 1500% after adjusting for TI. I would also like to emphasize that we hold a $25 million letter of credit that we can access if Mervyns files for bankruptcy or if Mervyns defaults and we terminate all the leases. In addition we hold three other letters of credit aggregating $8 million which we can tap if they default on individual leases," said Hurwitz.

By the end of 2006, Mervyns had grown to have 189 stores in 10 states, but by February 2007, the retailer had closed all of its stores in Oregon and Washington, thereby exiting those states in the northwest.

In February 2008, Macerich (NYSE: MAC) completed its acquisition of 43 Mervyns stores (30 located in malls, 13 freestanding or part of community centers), totaling 3.4 million square feet, for $430 million in a 20-year sale-leaseback transaction.

Macerich CEO Arthur Coppola explained the company's decision to seize the opportunity: “Thirteen of these Mervyn's stores are located in Macerich malls. We certainly did not want to have a traditional buyer all of a sudden become the owner of the Mervyn's stores in our regional Centers. In many cases, large tracts of land were connected to the Mervyn's stores. We realized that we would be able to buy both our stores as well as these others stores at a very attractive return. But, more importantly, we are able to open up redevelopment opportunities at all of our existing properties."

At the time, Macerich said, aside from those stores planned for redevelopment, it expected to dispose of the Mervyns stores over the next 18 to 24 months, no such dispositions have since been publicized.

According to CoStar Tenant, the typical Mervyn's is 65,000 to 85,000 square feet and serves as an anchor to regional malls. The company's headquarters building in Hayward, CA, is 432,000 square feet.
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