Another Department Store Will File for Bankruptcy: Should Real Estate Investors Worry?

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The coronavirus pandemic has had a brutal impact on retailers large and small. In fact, several department store chains have filed for bankruptcy in the course of the pandemic, and for some, that meant shuttering operations completely. Such was the case for Lord & Taylor, which closed all of its stores last year after almost 200 years in business.

But losing department stores isn’t just a blow to shoppers — it’s a blow to mall operators and their commercial landlords, who rely on department stores to serve as anchor tenants. The problem with department store closures is that finding replacement tenants for large, multi-floor spaces is a difficult task in general, and in an age when so many retailers are struggling, it’s even harder than usual.

As such, news that Belk, a privately owned department store chain based in Charlotte, N.C., is planning to file for bankruptcy may not sit well with real estate investors at first — especially those with money in mall REITs (real estate investment trusts). But while Belk is looking at a bankruptcy filing, it looks like malls will be spared any pain — this time around.

A quick and easy reorganization

Retail bankruptcies can be complex, but Belk recently released its Chapter 11 plans, and so far, they don’t seem too damaging to malls. The department store expects to file for Chapter 11 on Feb. 24, with the confirmation hearing to approve its restructuring to be held that same day. As such, its reorganization should happen quickly, and the details of it should be fairly noncontroversial.

The purpose of reorganizing is to allow Belk to reduce its debt by approximately $450 million. Belk will enter into a restructuring support agreement with its majority owner, Sycamore Partners, which recently bought bankrupt Ascena Retail Group‘s (OTCMKTS: ASNAQ) Ann Taylor, Loft, Lou & Grey, and Lane Bryant brands. Under the terms of the restructuring, Sycamore Partners will retain majority control of Belk.

But here’s the good news for malls: Belk is not expected to close any stores in the course of its bankruptcy filing or reorganization. Furthermore, it’s not expected to lay off any members of its staff. And while Belk did have to delay payments to some vendors earlier on in the pandemic, the hope is that its reorganization will put it on more solid financial footing going forward so it can not only keep up with its obligations but also remain a mainstay at malls.

Of course, given the events of the past year, the word “bankruptcy” is generally enough to incite fear in real estate investors, especially in the context of department stores. Right now, Belk’s Chapter 11 filing shouldn’t have a negative impact on malls, but if it, like other retailers, continues to struggle in the wake of the pandemic, things could change quickly.

The Millionacres bottom line

The hope is that once coronavirus vaccines become widely available, things will start to improve on the pandemic front, and foot traffic at retailers — and malls — will slowly but surely begin to increase. But we’re not there yet — not even close — so mall operators and investors will need to sit tight and continue to ride out the storm.