As Pier 1 Readies Itself for Sale, Lenders Prep for Default on Corporate Home

This article originally appeared in CoStar News written by Candace Carlisle on March 19, 2020; quoting Eric Horn. It is reprinted here with permission from CoStar News.

Prior to Coronavirus Pandemic, Pier 1 Expected to Gather Bids for Company By Monday

Home goods retailer Pier 1 Imports, which put itself on the market after filing for Chapter 11 bankruptcy protection last month, was cited by a financial services firm as the reason behind the loan of the Texas-based retailer’s corporate home being transferred to special servicing this month in preparation for imminent default.

The loan transfer, noted in a Morgan Stanley research report, said the 19-story, 409,477-square-foot building at 100 Energy Way on nearly 12 acres in downtown Fort Worth, Texas, occurred earlier this month in preparation for imminent default. In the report, Morgan Stanley analyst Richard Hill noted discussions with the borrower are ongoing. Hill was not available for additional commentary Thursday.

The Fort Worth office tower has been home to Pier 1’s corporate home since 2004. More than a decade later, Woodland Hills, California-based Hertz Investment Group purchased what was then Pier 1’s namesake tower in August 2018 for an undisclosed sum. At the time of the deal, Pier 1 had a lease totaling 309,227 square feet in a long-term commitment running through June 2027.

Since the acquisition, Pier 1 has been working to consolidate its leased space in the office tower in an attempt to decrease its footprint to three floors from about nine floors. A month after the Hertz purchase, the retailer began marketing 160,000 square feet of its space for sublease.

A Hertz spokesperson did not immediately respond to an interview request regarding the property or its loans.

Hertz Investment is only the third ownership group to own the property since Pier 1 sold it to Chesapeake Energy Group in 2008 for $104 million in a sale-leaseback deal. Later, Houston-based Hines bought the office tower in 2014 for $84.5 million before selling it to Hertz. The Tarrant Appraisal District last valued the building at $86 million.

The property has two commercial mortgage-backed security loans tied to it, including a $28 million loan and a $27 million loan, according to Morgan Stanley’s report. The financial services firm was not immediately able to comment further or answer questions about this particular property, a spokeswoman said Thursday.

Last month, Pier 1 put itself on the market after filing for Chapter 11 bankruptcy protection in the Bankruptcy Court for the Eastern District of Virginia. The retailer plans to conduct a court-supervised sale through its bankruptcy plan with qualifying bids due by or around Monday. The bids are subject to court approval.

In addition to selling the company, Pier 1 plans to use this process to complete the previously announced closure of up to 450 store locations or about 50% of its retail stores. According to February’s bankruptcy filing, the 58-year-old retailer, which was founded in California, had 923 stores left in its fleet. The company is also in the process of closing two of its distribution centers to reflect what will be a much smaller store footprint.

In its latest financial filings, Pier 1 reported a net loss of $59 million with sales dropping 13% in the third quarter of 2019. The continued losses reflect the company’s leadership change last November when once Chief Financial Officer Robert Riesbeck was promoted to chief executive officer.

In filing for Chapter 11 bankruptcy protection, Riesbeck and his team, prior to the coronavirus pandemic, expected business to run its normal course through the reorganization, including the retailer’s stores and online platform, with the help of a $256 million debtor-in-possession financing from Bank of America, Wells Fargo and Pathlight Capital LP.

Diminished Returns

The pandemic could have a significant impact on retailers going through Chapter 11 bankruptcy proceedings, said Eric Horn, a restructuring attorney at A.Y. Strauss.

“There’s been a ton of store closings with malls shuttering and locations restricting hours,” Horn said in an interview with CoStar News. “If you don’t get the foot traffic in, you don’t get sales. Without sales, you just aren’t bringing in the cash.”

When companies file for Chapter 11 bankruptcy protection, Horn said there are monthly sales projections included in the filing in anticipation of how creditors will be paid. With this significantly shifting, he added, it will equate into significantly diminished returns.

“I don’t see how liquidations take place when stores are shuttered,” he added. “They will need to extend their deadlines or come up with some other actions, which will require consent from landlords. The longer you push out liquidation, the longer rents you have to pay and rent is one of the largest expenses for retailers.”

For retailers relying heavily on brick-and-mortar locations, those sales can’t just be made up online, Horn said.

“We’re going to see a significant downshift in sales; this will break a lot of retailers,” he said.

For companies planning to file for Chapter 11 bankruptcy protection, Horn said he expects them to take a pause. The same goes for lenders, he added, who would rather get some money in the future than no money right now. Those companies already in Chapter 11 could be forced into Chapter 7 bankruptcy, but, Horn said, he expects creditors to help avoid that bankruptcy filing.

“They want to keep things out of Chapter 7 bankruptcy, which would add an additional layer of administrative costs,” Horn said. “The Chapter 7 administrative expenses would need to be paid up front before Chapter 11 administrative expenses, which would need to be paid before creditors for a diminished return. I expect lenders will work with borrowers and push things out.”