Bon-Ton’s Fortunes Shift, Investors Brace for Liquidation

Managing Director

CREModels quoted in this piece on Bon-Ton big-box department store vacancies; originally appeared on by Donna Mitchell

It seems that time is running short, putting more urgency on the decisions that landlords make concerning properties with Bon-Ton anchors.

About one week ago Bon-Ton Stores appeared to have escaped the spiral of bankruptcy and liquidation that haunts so many retailers these days, after it got an offer from a group of investors including REIT Washington Prime Group, fund manager DW Partners and Namdar Realty to buy the company.

By Monday evening, however, the Milwaukee-based department store operator’s fortune shifted dramatically after reports emerged that only a couple of bidders turned up at its liquidation auction, according to industry observers. Instead of a buyout, the discussion has now turned to liquidating Bon-Ton Stores for good.

“There are just so few precedents of a retailer that is on the death knell and makes a turnaround to become a viable, successful company,” says Kurt Jetta, CEO and founder of TABS Analytics, a Shelton, Conn.-based retail and consumer analytics firm. “I cannot think of one.”

And so it seems that department store brand with a long legacy will collapse under the weight of too much debt and not enough profits to cover its obligations. As of January 2017, according to the company’s latest annual report, Bon-Ton had $989.4 million in total debt, including capital lease and financing obligations. In its latest quarterly report, for the third quarter of 2017, Bon-Ton reported that adjusted EBITDA was down $5.2 million, it had a net loss of $44.9 million and same-store sales had decreased by 6.6 percent.

The retail industry responded to Bon-Ton Stores’ acquisition plan with skepticism. Washington Prime Group, a Columbus, Ohio-based REIT, and Namdar Realty Group, of Great Neck, N.Y., had planned to buy Bon-Ton Stores in the court-supervised bankruptcy process. Washington Prime had 15 leases with Bon-Ton Stores, representing about 1.4 million sq. ft. of space, 2.5 percent of the REIT’s total leased area and 0.9 percent of its rental revenue, according to an analysis from S&P Global Market Intelligence. The companies did not return calls seeking comment.

New York alternative asset manager DW Partners and Mason Asset Management, also of Great Neck, N.Y., were also partners in the would-be transaction.

“All they gain is a little bit of time,” Jetta says of the offer.

Tricky co-tenancy clauses in Bon-Ton leases

In Bon-Ton’s case, it seems that time is running short, putting more urgency on the decisions that landlords make concerning properties with Bon-Ton anchors. The retailer operates 250 stores in 23 states under the Bon-Ton, Bergner’s, Carson’s, Elder-Beerman, Herberger’s and Younkers banners. It mainly leases the buildings, the majority of which are located in the Northeast and the Midwest.

The concern for the retailer’s landlords, including companies like Washington Prime Group, is whether the loss of Bon-Ton stores will trigger occupancy and co-tenancy clauses in lease contracts with in-line tenants. The language in such clauses could allow in-line retailers to execute their option to get out of leases where shopping centers lose anchor tenants.

“That could be a big problem,” says Mike Harris, a managing director with CREModels, a real estate analytics firm. “Especially if there happens to be a Bon-Ton in a shopping center that also has a Toys R Us or Sears.”

Even if a string of bankruptcies forces several retail chains to liquidate, the vacancies can offer opportunities for investors and developers focused on mixed-use formats, Harris notes.

“We are seeing a ton of mixed-use development creep into malls, especially the enclosed mall space,” he says. “People are starting to use them for everything: apartments, gyms, call centers and sometimes office spaces.”

The aim is to take what was an enclosed mall and turn it onto a live/work/play complex, Harris says.

“A lot of it will come down to what that space will be used for after Bon-Ton leaves,” says Max Garbus, a practice director with CREModels. “We’ve seen call centers, offices and even vocational schools fill the spaces.”

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