The store closures announced by Shopko will likely have a minimal impact on commercial mortgage-backed securities (CMBS) in aggregate; however, DBRS, Inc. (DBRS) does see the potential for localized defaults as the company rejects leases across the country. In addition, the closures highlight the risk of exposure faced by retailers owned by private equity firms, specifically. According to Bloomberg, Shopko, which was acquired by Sun Capital Partners, Inc. in 2005, had sought debt restructuring from its lenders, but its efforts proved unsuccessful. With ownership unwilling to invest further in the company, Shopko filed for Chapter 11 bankruptcy protection in January 2019. Since then, the original closure list has ballooned to over 250, which will reduce the company footprint by more than half.
While DBRS identified only 12 loans in the CMBS universe with Shopko exposure, virtually all the stores backing CMBS collateral will close. With few exceptions, Shopko is the sole tenant at these properties, significantly increasing default risk across the related loans. Two loans have a balance greater than $25.0 million: One has high default risk, and the other is backed by distribution centers rather than stores and thus may not have a similar risk profile. For a complete list of the announced closures, please refer to the appendix.
Shopko Industrial Portfolio: COMM 2015-CCRE25
The largest loan associated with Shopko is its industrial portfolio secured in COMM 2015-CCRE25 with a balance of $49.8 million. While there may be short-term risk, the loan benefits from having two assets in Shopko’s primary markets and a third (Boise, Idaho) that could be backfilled. Rather than stores, this loan is backed by three distribution centers leased to Shopko through 2035. The centers are in Omaha, Nebraska; De Pere, Wisconsin; and Boise. According to Shopko’s website, there is one other distribution center in Lebanon, Indiana.
While the company has not announced the closure of its distribution centers, the post-bankruptcy store footprint will determine which of these centers Shopko retains. Given the list of closures, the Boise location is most at risk of closure. Nearly one-third of the closing stores are in Mountain West and Pacific Coast locations, including Utah (19 stores), Washington (12), Montana (eight), Idaho (seven) and Wyoming (six). Notably, all the stores in Washington, Oregon and Utah will close. Therefore, there may be no need for the Boise distribution facility.
Still, unless the Shopko bankruptcy results in a complete liquidation of the chain, DBRS expects this loan to make it through the bankruptcy. The centers in Wisconsin and Nebraska serve the heart of Shopko’s market — the Upper Midwest. Despite up to half the stores closing in this region as well, it remains a natural retreat point: The company is headquartered in Green Bay, Wisconsin, and its stores have a longer history and acceptance by shoppers in the area. Even if the Boise location closes, the effect will be minimal — it is the smallest of the three centers, accounting for less than 25.0% of the portfolio’s cash flow. Further, the Boise market ( Blanchard, Nicole, “Boise is the fastest-growing large metro area in the U.S., Forbes says,” Idaho Statesman, March 1, 2018) and Mountain West region are among the most dynamic in the country. This suggests that the property could be backfilled in a lease-rejection scenario.
Shopko Oregon Portfolio: JPMDB 2017-C5
The second-largest exposure in CMBS is the Shopko Oregon Portfolio, which has a balance of $27.3 million and is backed by three Shopko stores, all of which are closing. Hence DBRS believes this loan has high default risk. Although the three stores are part of shopping centers and are, in two cases, attached to other stores, they have separate owners who may be unwilling to fund shortfalls if the properties cannot be backfilled relatively quickly. The sponsor, Gordon Sondland, is a well-known real estate investor in Oregon and may be more equipped to support the property and backfill the space.
Among DBRS-rated transactions, three are exposed to Shopko with only the Indiana Retail Portfolio (GSMS 2014-GC26) having a balance greater than $10.0 million. One Shopko store in the portfolio will remain open.
Although Shopko closures should not affect CMBS on a large scale, the company’s filing comes on the heels of other bankruptcy filings by private-equity-owned retailers over the last two years. These include Claire’s, Sports Authority, Marsh Supermarkets, Gordmans, Eastern Outfitters, Payless ShoeSource, Gymboree and Toys“R”Us. At a number of companies, leveraged buyouts have saddled retailers with high levels of debt, leaving some unable to sustain themselves as the shift in the retail industry continues. Once these owners determine they no longer want to invest in their portfolio companies, large-scale closures and bankruptcies tend to follow. As such, transactions with high levels of exposure to private-equity-owned retailers are of particular concern. DBRS will continue to monitor the status of these companies and provide reporting where there are potential issues.