Office Depot closures put nearly $1bn of CMBS at ‘high risk’: Morningstar

Office Depot has announced plans to close 300 stores over the next three years, bringing $956.6 million worth of CMBS loans under scrutiny as being “high risk.”

There are 281 loans with an allocated property balance of $4.49 billion in CMBS with exposure to Office Depot, shows a Morningstar report released this week.

Of those loans, the report identifies over 70 (with a $956.6 million balance) backed by properties leased to the store as “high risk,” meaning they are either backed by a property with an occupancy rate that could dip below 80 percent following an Office Depot exit, have a near-term lease expiration, or have a debt service coverage ratio (DSCR) below 1.2.

“Even loans in which Office Depot occupies a smaller part of the [gross leasable area] could face refinancing issues if they lose the tenant, as the vacant space could indicate problems to lenders,” according to the report. And some are already underperforming and have upcoming maturity dates, analysts added.

The largest “high risk” loans include a $59.6 million loan in Citigroup Commercial Mortgage Trust 2007-C6 on a Pennsylvania shopping center, a $55.8 million loan in Morgan Stanley Capital I Trust 2006-HQ8 on a retail property in Colorado, and a $38.6 million loan in Morgan Stanley Capital I Trust 2011-C3 on a shopping center in California.

Office Depot, which had 1,513 stores in North America and about 1,800 stores globally at the end of the second quarter of this year, has already closed 400 stores between 2014 and 2016.

The office store chain joins a growing list of retailers with heavy CMBS exposure who have announced significant store closings. Ralph Lauren announced the closing of 50 stores this June, potentially impacting $1.44 billion worth of CMBS deal loans, while Sports Authority announced plans to close nearly 200 stores earlier this year, placing $3.13 billion in CMBS at risk.