Office Depot Store Closing Plans Likely to Affect NJ, PA Locations and CMBS Issues They Back

Office Depot store, Eagle Plaza Shopping Center, Voorhees, NJ (Steve Lubetkin photo/StateBroadcastNews.com. Used by Permission)

VOORHEES, NJ— Office Depot’s announcement earlier this month that it plans to close 300 more stores over the next three years is likely to include New Jersey and Pennsylvania assets, raising questions about the CMBS securities backed by those properties, according to a CMBS research report by Morningstar Credit Ratings . The report also identifies two locations in New Jersey that are already “dark,” or unoccupied, but which still are part of the property portfolio supporting a mortgage-backed security. New York-based Morningstar , which just received SEC recognition as a National Recognized Statistical Rating Organization able to issue credit ratings like Moody’s and Standard & Poor’s , says $956.6 million in properties backing CMBS instruments are showing “elevated risk.” “There are 13 Office Depot stores in Pennsylvania and New Jersey backing CMBS loans, two of which are already dark, and five of which have an elevated risk of closing, based off our analysis,” Sarah Helwig , associate analyst with Morningstar’ s CMBS Analytical Services, tells GlobeSt.com exclusively . “The impact of a closure ultimately depends on the borrower’s ability to re-lease the space. Dark or vacant anchor stores can indicate problems to lenders and therefore increase refinance risk, so we do see some risk associated with four of the loans that have upcoming maturity dates.” In response to a query from GlobeSt.com, Office Depot would not confirm that the stores listed are at risk for closing. “For competitive reasons, we do not provide a list of stores to be closed,” says Julianne Embry , senior manager, public relations, for the Boca Raton, FL-based office products retailer . Embry also declined to comment on the Morningstar evaluations. Morningstar identified the riskiest loans as those where leases are expiring before the end of 2018, with debt-service coverage ratios below 1.2x or a collateral vacancy rate that would fall below 80 percent if Office Depot were to vacate a specific property. In New Jersey and Pennsylvania, actively occupied properties in this category are: Eagle Plaza Shopping Center , Voorhees, NJ: The lease expires at the end of 2016. The property backs $11.4 million of a CMBS security called BSCMS 2003-T12. If Office Depot closes, the retail strip would fall to 40 percent occupancy, Morningstar says. Office Max – Philadelphia , Philadelphia, PA: Lease has expired, but Morningstar says the free-standing store is still occupied. The $5.2 million loan is part of JPMCC 2007-LD12, and is described as being in “REO” or “real estate owned” status. Closure would vacate the property completely. Madeira Plaza Shopping Center, Reading, PA: A $4.446 million loan is part of GECMC 2005-C4, and debt service coverage ratio is 1.0. The lease expires January 31. Closure would reduce the center occupancy to 90 percent. Miracle Mile Shopping Center, Monroeville, PA: Lease expires January 31, 2017. The allocated property balance is $59.6 million in a security called CGCMT 2007-C6. The debt service coverage is 1.13, and if the Office Depot closes, occupancy would fall to 85 percent from a current 92 percent level, Morningstar says. Feasterville Shopping Center , Feasterville, PA: Lease expires January 31, 2017. The store is allocated $13.967 million in DBUBS 2011-LC3A. If the store closes, occupancy drops to 72 percent from the current 100 percent. Morningstar also identified properties serving as CMBS collateral where Office Depot space is not being used, or “dark.”

Vacant Office Depot store in Millside Plaza Shopping Center, Delran, NJ (Steve Lubetkin photo/StateBroadcastNews.com. Used by Permission)

Millside Plaza, Delran, NJ: Lease expires September 30, 2016. The space is allocated $11.1 million in CSAIL 2015-C3. The center has 75 percent occupancy without Office Depot. Office Depot-Paramus, Paramus, NJ: The free-standing store is vacant, with 1.65x debt service coverage, and is allocated $5.124 million of MSC 2007-T25.