Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
What does it mean when a tenant goes bankrupt?
Bankruptcy doesn’t mean the end of a company. It can be an opportunity to shed debt, renegotiate leases, reorganize and come out stronger.
For the purpose of this brief discussion, let’s examine this question from the perspective of a retailer…many of which are entering bankruptcy this year.
Bankruptcies are set to snowball this year
Home goods chain Pier 1 recently announced plans to liquidate its business after failing to find a buyer. Modell’s announced plans to shutter its business in March. Grocer Earth Fare, which filed for bankruptcy in February, only found a buyer for parts of it. Stage Stores, which has 700 department stores predominately in mid-sized markets and rural communities, has warned it may need to liquidate if it cannot find a buyer.
Contrast their fortunes with retailers like Macy’s and Mattress Firm, which have utilized bankruptcy court protection to get out of bad leases and downsize to their most profitable stores. Some, like Gymboree and Payless ShoeSource, emerged from bankruptcy only to fall back in…but at least they had an opportunity to try.
Those opportunities to bounce back are likely to be fewer in the aftermath of the coronavirus outbreak, according to retail and restructuring experts. Retail was already facing broader challenges as shoppers increasingly abandoned malls for online commerce. Now the financing for retail isn’t there as banks tighten their purse strings. It’s not clear that shoppers are going to be there, either. A second wave of the coronavirus could be on the way later this year as states relax social-distancing guidelines and reopen their economies.
Given the fact that unemployment on its way to 20% and social distancing is an unpleasant reality, it’s difficult to envision a world where a bankrupt company trying to emerge from a Chapter 11 proceeding is going to be able to put forward financial projections that lenders have confidence in.
So far this year, the number of liquidation plans by bankrupt retailers has not outpaced previous years…but it’s only June. Five of the 15 retailers that have filed for bankruptcy to date have announced plans to shutter their businesses, according to data provider Debtwire. Some of those retailers could still turn into a liquidation. Last year, 16 of the 25 retailers that filed for bankruptcy liquidated. The year prior, 11 of 23 bankrupt retailers shuttered their doors.
The full impact of the government lock downs has only begun to be felt. Neiman Marcus, J. Crew, Stage Stores, J.C. Penney and Centric Brands have filed for bankruptcy. Many more are expected to come.
More bankruptcies and liquidations would put further pressure on many of the remaining retailers instead of letting them benefit from reduced competition because as malls lose their anchor stores, shoppers have even less reason to visit there.
For J.C. Penney, the ability to emerge from bankruptcy could affect as many as 85,000 employees. The retailer filed for bankruptcy on May 15 after years of waning sales and an attempted turnaround. In bankruptcy, the retailer is hoping to expedite its sought-after turnaround. It’s evaluating spinning off its real estate into a real estate investment trust and has said it’s shuttering 30% of its stores.
J.C. Penney has limited cash to fuel its turnaround ambition. According to experts, that limited cash pool could hurt its ability to climb out of bankruptcy. Penney’s needs every dime it can get to remodel stores and persuade vendors to keep shipping to them. It’s not a reorganization where just reducing debt will put things right.
For landlords, a tenant filing for bankruptcy is bad news…but not as bad as the tenant closing its doors for good. Many retailers find themselves in no-win situations so expect to hear a lot more about bankruptcies in the months to come.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com